Why markets may 'have gotten ahead of themselves'

Tue, Jan 2, 2024, 11:04 AM

McKinney states stocks already had "a great 2024 during the fourth quarter of 2023" as the Federal Reserve signaled potential interest rate cuts down the line. He believes the instant rally on that dovish tilt leaves "concern that they might have gotten ahead of themselves" with 2024 gains pulling forward.

In his view, aggressive pricing in of rate cuts sparked an "everything rally" leaving little upside this year after markets instantly capitalized on the Fed pivot. After considering the hype around Fed optimism, McKinney is already questioning how much fuel is left in 2024 if economic risks remain.

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Video Transcript

[AUDIO LOGO]

RACHELLE AKUFFO: We're about two hours into the first trading day of 2024. The S&P and NASDAQ taking a hit, but many strategists are optimistic about where the market is heading through year end. We've covered several bullish calls for the S&P 500, but our next guest is more cautious. We have Burns McKinney, MFJ Investment Group managing director and senior portfolio manager joining me this morning. And happy new year to you.

So I want to break some of this down because a lot of people are still feeling very bullish now, but could it be that a lot of the gains have already been taken at the end of the year, and we're just sort of treading water at this point as we're looking ahead to potentially six rate cuts that some investors are pricing in?

BURNS MCKINNEY: That's definitely a possibility. I mean, the way I've sort of been viewing it is that the stock market had a great 2024 during the fourth quarter of 2023. And, you know, you've seen really the one, you know, fulcrum upon which stocks have been trading on for the last, really, 12 months have been what's going on with interest rates.

And so when you have the great pivot of 2023 when the Fed said, OK, we're going to move from rate hikes to rate cuts, the market's moved pretty quickly. There is some concern they might have gotten ahead of themselves a little bit. I mean, it's sort of, I like to think there's an old book, you give a mouse a cookie because you give a mouse a cookie, he's going to ask for milk. You give him milk, and so on, and so on. And that's kind of how the stock market is a little bit.

The Fed tells the markets OK. Maybe we might cut rates three times in 2024. And the markets say, hey, no, how about six times? And as a result of the fact that they've already in many ways priced that in, a lot of those gains may have had. If you think about, well, what are the ways that the market could appreciate at a fast pace in 2024?

I mean, you've got the S&P is trading at 21 times earnings, you shouldn't expect a lot of multiple appreciation. We've gotten that. Earnings are forecast to grow at 10% to 12%, so that's pretty optimistic too. And we're already pricing in six rate cuts. And so I think the risk-reward is perhaps behind us a little bit.

That said, I mean, I think that interest rates will be coming down a little bit. And so it's hard to really warn against fighting the Fed and fighting the markets on that front.

RACHELLE AKUFFO: It's true. So then what do you make of the breadth of the rally that we've had so far? Obviously, a lot of focus on the Magnificent Seven, but also small caps as well.

BURNS MCKINNEY: Yeah. I think that's one of the best stories that came out of the Fed pivot last quarter was really, everything rallied sort of we call it the everything rally. And everything moved pretty quickly. But what was kind of interesting to us and exciting about it is that the breadth did expand. You kind of went from the Magnificent Seven to the mundane 493.

And then you saw small caps do well. You saw a lot of what actually hadn't performed well in 2023 really rally, whether some of the interest rate-sensitive names like utilities, or REITs. You know, some of the financials, even regional banks did pretty well.

And so that is one thing that investors can look forward to in 2023 is that maybe don't go all in on the market, but it should be a good market for stock pickers based on the fact that with that expansion, the rest of the market outside of that Magnificent Seven is really hasn't gone anywhere for the last couple of years. And so there's some areas where earnings have continued to grow, and as a result, valuations are more appealing. But you do need to be a bit more selective this year rather than just going in and just loading up on the S&P 500.

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