Happy New Year Everyone!
This is a last-minute article from me. I’ve always been a big fan of Byron Wien’s 10 Surprises (unfortunately he passed away earlier this year). So I thought it would be a fun exercise to try and come up with 10 surprises that are both plausible but somewhat off the beaten path (if ended up being harder than I thought).
I’ve tried to assign a probability to each (borrowing from Philip Tetlock’s research on forecasting). But if some big geopolitical event happens (like a shooting war between the US and Iran), then all bets are off.
I’ll circle back at the end of 2024 to see how wrong I was and without further ado, here are my 10 surprises for 2024.
#1. US economy re-accelerates. Right now all the discussion is whether the US economy has a soft-landing (immaculate disinflation) or hard-landing (recession). But what if there’s no landing (i.e. the US economy picks up)? It might sound far-fetched but hear me out. Financial conditions have loosened a great deal. Housing starts are picking up. Consumer confidence is rising (thanks to plummeting gasoline prices ). Meanwhile, the US Federal deficit is still north of 5% of GDP and the labor markets remain tight. The Atlanta Fed’s GDPNow keeps rising (now up to 2.7% for Q4). Yet markets don’t seem at all prepared for this possibility. Probability: 25%
#2. US 10-year bond hits 4.75% (again). 2024 will be another tough year for fixed-income investors (although not as bad as 2022). The rule of thumb is that 10-year bonds should trade in line with nominal GDP growth. In both soft-landing and re-acceleration, that would put nominal GDP growth north of 4.5% (and much higher if the economy picks up). Probability: 33%
#3. Microsoft overtakes Apple as the world’s largest company (by market cap). Apple is currently #1 with a market cap of just over 3 trillion (versus 2.8 trillion for Microsoft). But 2024 is going to be a tough year for Apple. The forced switch to USB-C will take a bite out of Apple’s accessory business. Meanwhile, Epic Games’ lawsuit against Google and Apple (over their cut of app store revenues) concludes with a big loss for the tech giants. Throw on top of that already declining revenues, trading over 30x earnings, and struggles in China for some serious headwinds for the company. Probability: 75%
#4. Tesla stonk drops below $60/share. Full disclosure, I am a long-time Tesla bear (with a small short position in the name) so take this prediction with a pinch of salt. But 2024 is the year Elon Musk’s luck runs out. It isn’t because of some big scandal. But just a boring case of a declining automobile business. Tesla’s line-up is old (and getting older). Elon’s antagonized and alienated his core customer base. But most importantly, Tesla is committing the cardinal sin of the automobile industry; too much manufacturing capacity. Meanwhile, Elon’s other ventures desperately need cash (especially Twitter) so expect him to start selling (again). Probability: 33%
#5. $CAD (to $USD) touches 65c (or ~1.54 on the inversion). While the US economy continues to boom, Canada’s economy continues to stumble. An economy that has become leveraged to housing continues to struggle with in a non-ZIRP world. Capital spending will likely remain muted due to depressed commodity prices. Bank of Canada Governor Tiff Macklem puts on a brave face but is eventually forced to start cutting rates (and long before the US Fed). $CAD hits a 20-year low. Probability: 25%
#6. Canadians go to the polls before July, and we get a new Prime Minister. Justin Trudeau (Canada’s Prime Minister) and the Liberals don’t have to call an election until October 2025 so no one expects an election in H1 2024. But it’s still a minority government and their junior partner - the NDP and its underfire leader Jaghmeet Singh - sees an opportunity to move up the ranks and therefore brings down the government. The Conservatives take a majority while the NDP pick up seats in numerous (previously) liberal strongholds and become the official opposition. Probability: 33%
#7. European Central Bank is the first major central bank to cut rates. Christine Lagarde, the ECB’s President, can talk tough but there’s no denying how weak Europe’s economies are. Before March is over, the ECB will be the first (among the US Fed, BoJ, Bank of England, and the People’s Bank of China) to start to cutting rates. Probability: 66%
Sidenote: I think the ECB should have started cutting rates back in September.
#8. The next United States President is neither Joe Biden nor Donald Trump. The polls have been pretty consistent for quite some time. American voters don’t want either Joe Biden or Donald Trump. They’re both too old and carry too much baggage. The party that finds a way to nominate someone else wins the 2024 election. Nikki Haley (R) seems to be the current favorite although Gavin Newsom (D) and Gretchen Whitmer (D) are strong contenders. Probability: 20%
#9. Frustrating both the bulls and bears, oil has a very quiet 2024. The past couple of years have been extremely volatile and tumultuous. But 2024 will be a year where oil trades in a tight band, with WTI range bound between $75/bbl and $90/bbl. Strong demand growth from the “Global South” (led by India) will more than offset weakness from Europe. But upside strength will be capped by OPEC spare capacity. Probability: 33%
Sidenote: Now that I’ve made this prediction, the opposite will probably happen.
#10. The TSX (Canada) handily outperforms the S&P (US). It might seem strange. A weak economy doesn’t seem like it bodes well for equity prices. But the TSX is geared more towards exports, so a cheaper $CAD will more than offset weakness in banking and real estate. Bank of Canada will likely cut sooner (and more) than the Fed plus a change in government will help boost investor confidence. Lastly, the TSX is only trading at ~15x trailing earnings (versus ~21x for the S&P 500) so you don’t even need much to go right. Probability: 50%
#Bonus Pick. It’s coming home! England wins Euro 2024! Hahaha! Who am I kidding? England will get knocked out in the quarters (like they always do). Probability: 0.1%
Disclaimer: This newsletter and/or any other articles that I publish should not be construed as investment advice. None of the strategies or securities mentioned should be considered as an investment recommendation to buy or sell. I am not an investment advisor and I highly recommend that anyone considering this investment strategy or any of the securities first consult with a registered investment advisor to assess both the suitability and risk of any strategies or securities that are mentioned.
Some brave calls! Hope you’re right about #6...