Q1 2024 Equity Index Forecast: SPX, Nasdaq, Dow and DAX

Stocks Turn the Corner in a Major Way

The Nasdaq 100 set its yearly low in the first week of 2023 and only continued to scale higher as the year developed. There were some risks that were shrugged off along the way, such as the banking crisis in March or the flare in Treasury rates that ran from July through October. But as we move into the close of 2023 trade the index is working on its strongest yearly performance since 2009. And with rate cuts set to begin at some point in 2024, this could further add push behind the risk-on trade, although the way those cuts begin will likely have a determining factor on what the net impact will be and how it will play out.

With both Treasury Secretary Janet Yellen and FOMC Chair Jerome Powell declaring confidence behind the ‘soft landing’ scenario, equities are poised to continue gains into the New Year. This will not be without risk, however, as the start of rate cut cycles can create capital flows into bonds and away from stocks and if this happens abruptly, the impact could be sizable. But, if it happens in a smooth and orchestrated manner, such as we saw in 2019 when the Fed cut rates three times, the impact can potentially be moderated without significant disruption.

The bigger issue would be the rationale behind earlier or more sizable rate cuts, as the Fed responding to an emergency of some sort, combined with a forceful flow of capital into short- term debt, could create a headwind which equities may not be able to rally through. This could create a conundrum, but we’ve seen similar risks flare over the past couple of years and each has been offset by either the Federal Reserve or the Treasury department manoeuvring, and with an election year coming in the United States there could be even more motivation for the US government to smooth volatility.

As illustration of the relationship between recessions and rate cuts, the below chart from the St. Louis Federal Reserve highlights the Fed Funds rate since 1955 along with recessions in the United States, which are represented in the shaded areas below. There are ten instances of recession that are denoted on the chart, and seven of those have started after the Fed had begun to cut rates. So rate cuts aren’t necessarily a panacea for stocks, or the economy.

Federal Funds Rate since 1955 with US Recessions Plotted with Shaded Areas

_{Data from FRED, St. Louis Federal Reserve, Fed Funds}

This Isn’t Your Grandfather’s Fed

While ‘this time is different’ is a widely panned remark across markets, the prospect of over- emphasizing small sample sizes could offer similar peril. The fact of the matter is that each of those ten scenarios on the chart above were unique circumstances and the relationship between rate cuts and recessions is imperfect, so it would be remiss to assume that rate cuts will automatically bring a recession. And perhaps more to the point, even if there is a recession, automatic assumption of pain in equities could be misguided, as well.

On the below chart of SPX since 1955, I’ve plotted each of those ten recessionary

environments with a red vertical line. While both 2001 and 2008 were severe, after the Fed sprang to action with both low rates and QE in 2008, the trend has been remarkably smooth with only minor disruption, and that now includes the rate hiking cycle that began in 2022.

And to quote Chair Powell from his appearance on 60 Minutes in May of 2020, there’s ‘no limit’ to what the Federal Reserve can do with the liquidity programs that are available to them.

SPX Monthly Chart Since 1955 (Logarithmic)

_{Chart prepared by James Stanley; data derived from Tradingview}

SPX for 2024 – ATH into 5,000

The S&P 500 has held up well through this hiking cycle, all factors considered. After retracing 50% of the major move that sprung from the lows of the pandemic as rate hikes were pricing in during 2022, bulls have been able to hold the reins for much of the past year. The banking crisis that showed up in March served as a boost for the risk trade, and then Chair Powell’s appearance at November and December FOMC rate decisions helped to reinvigorate buyers in late-year price action. This was driven by the thought that the Fed was complete with rate hikes and that the next move would be a cut.

From the weekly chart below there’s just one point of resistance left before fresh all-time highs come into the picture, and that’s the 4818 level that was traded in the opening days of 2022. Above that, the psychological level of 5,000 lurks above and that would seem like a logical next spot of resistance, and a level of that nature may even create a pullback type of scenario given that it’s never traded before.

Above the 5,000 level, there’s a Fibonacci extension that plots at 5,180, which is approximately 9.5% away from current price; and this would be the next topside area to investigate for resistance beyond the big figure.

SPX Weekly Chart (Logarithmic)

_{Chart prepared by James Stanley; data derived from Tradingview}

Nasdaq

While it’s been a strong year for the SPX, it’s been an even stronger outing for the Nasdaq which is working on its largest annual gain since 2009 with a gain of more than 50%. That’s a massive trend by any measure, and it can be simple to look at a scenario of that nature and assume some element of mean reversion to follow. But, like the weekly chart above of the SPX, there is little sign of bulls letting up and there remains bullish breakout potential as driven by the excitement of softer monetary policy.

Given that greater incline, there could be more vulnerability to pullback themes, such as we saw during 2022 trade and like pullbacks in 2018-2019 and 2020; but each of those turned out to be significant buying opportunities for bulls and there could be a similar backdrop in the event of a sell-off in stocks in 2024 as rate cuts begin.

The current all-time high already appears vulnerable and this may soon be taken out. Beyond that, the 17,500 level would be a natural resting place for follow-through resistance, but it’s

the 127.2% Fibonacci extension of the pullback move that plots just below 18,500 that sticks out. That’s 11% away from current price, while the 161.8% extension of that move is all the way up at 20,673, or 24% away. If the breakout takes hold in the way that the trend traded, particularly in Q4 of this year, those levels could be attainable targets for bulls.

NDX Monthly Chart (Logarithmic)

_{Chart prepared by James Stanley; data derived from Tradingview}

Dow Jones – 40k

The Dow Jones Industrial Average has already established a fresh all-time high and while its 2023 performance lags both the Nasdaq and SPX, the technical backdrop remains open for further gains given that fresh breakout. Sitting overhead, however, is a major psychological level at 40,000 that’s currently around 7% away from current price. Given the Dow’s 2023 outlay of an approximate 12.5% gain (as of this writing) compared to the 23% in SPX and the +50% in the Nasdaq, that would seem a reasonable target for the blue-chip index for next year.

Dow Jones – Monthly Chart (Logarithmic)

_{Chart prepared by James Stanley; data derived from Tradingview}

Dax – Germany

Given the brief history of the European Central Bank there’s little historical reference for rate cut cycles. On the below chart I’ve marked the time of first cut for each of those three cycles that have shown since the year 2000. It’s the 2011 instance that’s of interest, as this was a moderate series of cuts and given the pattern with which those cuts priced in, as opposed to the emergency actions of 2001 or 2008. Slow, steady and methodical cuts can possibly be absorbed by the financial system without significant unrest. But fast and aggressive cuts can quickly trigger a bull market in bonds and if capital begins to leave the equity space, a new theme can quickly develop, much as we saw in those two earlier instances.

For 2024 targets, there’s a Fibonacci extension near 17,500 which is approximately 4.3% away from current price: after which another spot shows around the 19k level that’s 13.3% away. If the ECB is able to cut rates slowly next year, without any abrupt emergency actions, that latter level could very much be attainable.

DAX Monthly Price Chart (Logarithmic)

Chart prepared by James Stanley; data derived from Tradingview

Written by James Stanley, Sr. Strategist

Follow Michael on X: @JStanleyFX