According to one technical strategist, stocks are likely to face a tumultuous year, while the U.S. 10-year Treasury yield is expected to soar above 5%. After a remarkable rally in the final months of 2023, the S&P 500 ended the year with a 24.23% gain, marking its fourth positive year in the last five. However, there are concerns that the market’s optimism may be misplaced, and the current pricing of interest rate cuts could be too optimistic. Ron William, the market strategist and founder of RW Advisory, believes that the market is at a “behavioral inflection point” following the dovish pivot by the Federal Reserve. In his analysis, William emphasizes the importance of momentum, sentiment, and sector rotation fragility, which have been crucial factors throughout the previous year. While the market has been banking on excessive valuations, William argues that the true dependence lies on growth numbers, indicating that we are in a late-cycle phase.
The surge in the Wall Street benchmark was driven primarily by a handful of sectors. Information technology stocks rocketed by 56.4%, while communication services and consumer discretionary sectors gained 54.4% and 41%, respectively. However, William points out that macro, fundamental, and technical analysis by RW Advisory suggests a mean risk aversion to U.S. equities due to extreme overbought conditions and a “dash for trash” phenomenon. This trend, observed at the end of the year, saw speculative investments pouring into smaller-cap, lower-quality stocks. Furthermore, William highlights the vulnerability of economic-sensitive stocks if the Fed lowers rates and if we continue to be in a late-cycle stage where growth may disappoint.
The yield on the benchmark 10-year U.S. Treasury note hit 5% in October, a level not seen since 2007, as central banks indicated a longer-than-expected period of higher interest rates. However, the dovish pivot by the Federal Reserve and increased expectations of rate cuts in 2024 caused the 10-year yield to plummet to just over 3.9% by Tuesday morning. Despite the market anticipating as many as six rate cuts this year, William believes that bond yields will eventually exceed the 5% mark in the long term. He attributes this to a “structural higher for longer trend with rolling waves of volatility.” Although the recent correction in rates and the subsequent rally in stocks suggest that much of the positive momentum from potential rate cuts has already been priced in, William cautions that the market may be overestimating future rate movements. He also acknowledges the possibility of a policy mistake and emphasizes the significance of looking for inflection points and non-consensus moves.
Amid a potentially weak outlook for risk assets and an increasingly tense geopolitical environment, gold experienced its strongest year since 2020, closing 2023 comfortably above the $2,000 per ounce mark. William predicts that the demand for safe-haven assets will continue to grow in 2024 as geopolitical tensions deepen. He anticipates a breakout in the gold market, with prices surpassing the $2,700 mark by the end of the year.
The year ahead presents numerous challenges for stocks and Treasury yields. The uncertainties surrounding economic growth, interest rate cuts, and geopolitical tensions create a volatile environment for investors. It is crucial to closely monitor market dynamics and carefully evaluate investment strategies to navigate these uncertain times successfully.