- The normal business cycle can be used as a guide rather than a hard and fast rule, something the majority of economists and financial talking heads tend to forget.
- Both US stock indexes and US Treasuries are in long-term uptrends, the latter turning bullish at the end of November 2023.
- Commodities are a mixed bag, though our fundamental reads are not as bullish as they've been in years past.
As we make our way through the holiday season, with the end of 2023 growing larger on the horizon, the question has been asked as to which market sector could make the biggest gain during 2024? The list of contenders are familiar: US Treasuries, US stock indexes, and commodities. I’ll lay out what I’m expecting to see with each, though there is no accounting for the wildcard of the next US Presidential Election come November and the subsequent market reaction/overreaction. There’s a lot I could say about the US political situation, but not here, not now. Let’s look at markets instead.
You might recall I’ve talked about the normal business cycle in the past, though I view this cycle similar to seasonality. It can be used as a guide as to what tends to happen, but not a hard and fast rule as to what will happen. That’s the problem so many economists have faced with the ongoing US and global economic recovery: The pieces didn’t fit with what they viewed as market absolutes. This means the economists sect completely forgot about the Vodka Vacuity[i](There are no Absolut(e)s in market analysis).
A quick recap of standard business cycle stages looks like this[ii]:
- Bonds turn up (stocks and commodities falling)
- Stocks turn up (bonds rising and commodities falling)
- Commodities turn up (all three markets rising)
- Bonds turn down (stocks and commodities rising)
- Stocks turn down (bonds dropping, commodities rising)
- Commodities turn down (all three markets dropping)
Where are the various market sectors heading into 2024? Let’s review what we know about long-term trends.
- US stock indexes moved into long-term uptrends at the end of October 2022.
- US Treasury futures moved into long-term uptrends at the end of November 2023.
- Commodities are a mixed bag, with the various sectors showing us different long-term trends.
From this we can see stocks turned up before bonds, already switching the first two stages of the normal cycle. This raises a couple interesting questions for the new year:
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Can US stock indexes continue to find buying interest to push higher?
- The Dow Jones Industrial Average ($DOWI) hit a new all-time high in late December.
- Will the uptrend in bonds hold if talk from the US Federal Open Market Committee (FOMC) turns less dovish and more hawkish?
Both these markets could hinge on what happens with US interest rates. After the December meeting of the FOMC, Chairman Powell talked about how 2024 could see rate cuts totaling 75-basis points. This was interpreted a number of different ways, starting with the first possibly coming in March. On the other hand, the FOMC could wait until its December meeting and take care of it in one fell swoop. We won’t know until it happens, so there isn’t a lot of value in constantly making guesses.
What about commodities, though? As usual this time of year, I like to mention the Three Kings.
- Crude oil, both WTI (CLG24) and Brent (QAG24), moved into a long-term uptrend on its monthly chart with a new 4-month high this past August.
- Gold is a tough call at this time. Early in December the cash index (GCY00) hit a new all-time high of $2,122.65 but as the end of the month approaches it is in position for a potential lower monthly close. This would complete a bearish reversal pattern, technically, indicating the long-term trend has turned down.
- Corn has been in a long-term downtrend since May 2022 with the Barchart National Corn Price Index (ZCPAUS.CM) hitting a low of $4.2329 during November. While it looks like the NCPI is in position to turn bullish, it has not completed a bullish reversal pattern as of this writing.
Putting the wild Softs sector aside for the time being (home of the Psychotic Six (markets) that have taken turns going to new all-time highs the past couple years), we could make the case the commodity sector has been in a long-term downtrend, but is in position to turn up. If so, this would fit with the previously mentioned Stage 3 of a normal business cycle (all three markets rising). However, late in 2023 I don’t see the fundamental situation that would drive commodities higher long-term.
- The WTI Crude oil forward curve has gone from backwardated (inverted) to a contango (carry), at least through the May issue.
- The gold forward curve is also in a contango (carry), though it isn’t that unusual for precious metals.
- Corn futures spreads are neutral-to-bullish, with the March-May and May-July covering a neutral level of calculated full commercial carry while new-crop spreads are bullish. Some of the latter is due to the Nov24 soybean/Dec24 corn spread showing soybeans could buy acres away from corn in the US next spring.
Given commodities do not have overwhelmingly bullish real fundamentals, as of this writing, and US stocks and Treasuries are building bullish momentum, it is easy to picture a market situation with the flow of money coming out of commodities and into the other two, feeding their long-term uptrends. But that might not be as bearish as it sounds. Recall funds have been holding net-short futures positions in corn and wheat, meaning short covering rallies could drive markets higher despite a lack of fundamental support. For a recent example of what can happen, look no farther than Chicago (SRW) wheat futures.
With this in mind, I see 2024 playing out as a year when US stock markets and Treasuries extend their long-term uptrends, while commodities struggle to maintain bullish momentum. In fact, based on previous analysis of the cash corn index I see the intrinsic value of the market moving to a new low next spring.
Now, about that upcoming Election…
[i] Vacuity: The quality of fact of being devoid of something specified. In this case, market analysis is devoid of absolutes.
[ii] From Intermarket Technical Analysis by John J. Murphy, 1991 edition, pg. 228
On the date of publication, Darin Newsom did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
