Stanley Druckenmiller, the highly respected money manager who never reported a single negative year during his tenure, proclaimed recently that the stock market may not rise much, if at all, over the next decade.
It might seem like a bold prediction but history informs us that there have been long periods where the stock market failed to make new highs. For example, from 1966 to 1981, the market essentially went nowhere.
Even if we look back a couple of years, the S&P 500 made a high of 4,766 around Dec 31 2021 and, a couple of years later, remains under that threshold.
Just because the market doesn’t eclipse old ceilings doesn’t mean money cannot be made on the swings, but what can we reasonably forecast in next three years?
To begin, let’s look at what to expect in 2024.
Where Will The Stock Market Be Next Year?
If we were to look at nothing beyond Presidential Cycle Theory, we could with some confidence predict that 2024 will not be as good a year in the stock market as 2023 has been to-date.
That’s because this year is the 3rd year of the Presidential Cycle, which on average has performed approximately 200% better than each of the other three years of the cycle since 1933.
In the first and fourth years of a Presidential Cycle, the stock market has averaged a gain of 6.7% while in the second year, the worst year, it has an average gain of 5.8%.
The crucial third year, which we are in now, has historically delivered average gains of 16.3%. Currently, the S&P 500 is up 18.0% for the year, a hop skip and a jump from the historical average rise.
Absent some huge surprise, the odds are 2023 will end right in line with historical averages, somewhere in or around that 16% mark. Next year, though, could be a different story altogether, and may be closer to a 6.7% gain if history repeats.
What has some market observers skeptical that it will rise next year is the combination of macro headwinds hurting the economy. They include rising interest rates, persistently high inflation, mortgage applications at 2008 lows, and a ballooning interest payment on national debt.
It takes some time for rising interest rates to finally take a toll. Homeowners with mortgage rates locked in don’t feel the brunt of higher rates, only new buyers do. Similarly, corporations only pay higher debt service payments when they refinance or debt matures. It’s generally consumers who are tethered to credit cards that suffer most when rates go up.
As a result, the effects of rising rates take time to bulldoze their way through the economy. By 2024, those effects may be fully felt, though.
Some respected market analysts, like Cem Karsan, forecast that the probability of a blow-off top in early January 2024 may precede a strong correction in 2024. If so, next year the stock market may be considerably lower than where it sits today.
Is that what the top Wall Street research analysts see too?
What Does Schwab Forecast?
Schwab has come out with its own longer-term forecast and is anticipating 6.1% growth rate for U.S. large company stocks through 2032.
That’s slightly lower than their annualized growth rate for small-company stocks, which is 6.5%. International large company stocks are projected to rise by 7.6% annually.
These equity projections are especially insightful given that they expect investment grade bonds to rise by 4.9% annually, meaning the additional premium for selecting historically more volatile equities is not more than 2% annually.
Indeed, cash alone is forecast to rise by 3.3% annually, a figure that is lower than what many savings accounts offer these days.
In Schwab’s forecasts are a collection of variables that range from GDP projections to cash flow drivers and from size-risk premia to credit ratings.
The Surprising Result of Both Forecasts
So where will the stock market be in 3 years? According to Presidential Election Cycle Theory, the stock market will not rise higher than 18% within 3 years. In other words, in the next 3 years, the S&P 500 will rise as high as 5,326 but not higher if the theory holds true.
According to Schwab’s forecasts a similar gain could be anticipated, but perhaps surprisingly both forecasts strongly align, meaning annual gains of more than 6% should not be expected.
Certainly there are enough headwinds to suggest that exuberance should be tempered. JP Morgan highlighted reasons for concern heading into 2024. For one, slowing labor activity should act as an economic drag. As job growth slows and unemployment rises, a slowdown in economic activity can be anticipated.
Jamie Dimon’s firm anticipated that the Federal Open Market Committee is likely to lower interest rates in the second half of the year to avoid a recession but equally that means the FOMC is likely to keep rates steady until then.
Further, they expect the fiscal stimulus, so prevalent over the past few years, will turn into a fiscal drag next year.
How Should Investors Prepare For Next 3 Years
Warren Buffett famously commented that forecasts tell you a lot more about the forecaster than the forecast itself does. The point is that it’s very difficult to accurately predict the future and so it’s worth taking the consensus views over the next few years with a grain of salt.
We don’t need to look back very far to see that, at the end of October, projections were very bearish for the stock market. Then, in a period of two weeks in early November, the S&P 500 rallied higher by 7.5%.
Typically, price drives narratives, not the reverse. That being the case, it’s best not to make too many bets based on what is likely to happen but rather to “trade what you see” as the best investors say.
If the markets are rising, don’t fight the trend. And if they’re falling, don’t catch a falling knife. Ride the trends where possible.
The discipline to do the right thing is often hard, meaning if all moving averages are pointing down, it’s usually not prudent to be the brave trader buying the dip. Similarly, betting on a market hitting a ceiling and shorting it is frequently a fool’s errand.
If concern is rising over what the future may hold, consider selling LEAPS calls against shareholdings to offer more protection against downside risk while locking in reasonable gains if they happen to be called out.
And of course make sure excess cash in checking accounts is allocated to higher yielding savings accounts or even Treasury bills that are paying north of 5% these days.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.