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2023’s version of Wall Street teaches us the repeated lesson to expect the unexpected in equity markets. Equity markets are rooted in the inherent complexity and unpredictability of financial systems. Markets are influenced by a myriad of factors, including economic indicators, geopolitical events, and human behavior, making them susceptible to sudden and unforeseen changes. Attempting to predict these fluctuations with absolute certainty is challenging.
“Simplicity is the Ultimate Sophistication”
Why do some of the brightest minds, like doctors and lawyers, often underperform their peers? While intelligence is helpful on Wall Street, it can also be a double-edged sword because it leads to overthinking and “paralysis by analysis.” Breaking down markets to their simplest form can help investors by providing clarity, facilitating better understanding, and aiding decision-making. Below are five, simple but powerful rules to follow in 2024 to achieve profitability:
“Don’t Fight the Fed”
Monetary policy, set by the US Federal Reserve, influences liquidity in the financial system, which, in turn, impacts equity markets. When the Fed lowers interest rates, they increase the availability of money and credit. This added liquidity encourages borrowing, spending, and investing. The best way to track the Fed is to look at the CME FedWatch tool. Currently, the FedWatch tool predicts that the Fed is done hiking interest rates and will ease rates by May 2024.
Image Source: CME Group
Strength Begets Strength
Newton’s First Law of Motion states, “an object in motion stays in motion...”. According to the data, Newton’s First Law also applies to equity markets. Analyst Ryan Detrick points out that “This month will go down as one of the best ever for the S&P 500. (+8.5%). Did you know that after previous months that gained >8%, continued strong returns were common?” Historical returns show us that a year later the S&P 500 was higher 90% of the time and up 15.8% on average.
Image Source: Ryan Detrick, Carson Research
Be Open Minded
The concept of being in the interpreting game rather than the predicting game emphasizes that instead of trying to foresee specific market movements, investors should focus on interpreting available information and adapting their strategies accordingly. In other words, try to have an open, unbiased frame of mind. After the drubbing tech stocks took in 2022, few expected them to outperform the way they did in 2023. Could the market once again fool the masses and drive dramatic rallies in beaten-down sectors like the Nasdaq Biotech ETF ((IBB - Free Report) ),Russell 2000 Index ((IWM - Free Report) ), and the Regional Banking ETF ((KRE - Free Report) )? Recent relative price strength suggests that this is likely to occur.
Image Source: TradingView
Fade the Masses
George S Patton famously said,“If everyone is thinking alike, then someone isn’t thinking.” On Wall Street, the madness of crowds cannot be understated. In 2023, the market reversed course in the opposite direction each time the CNN Fear/Greed Sentiment Indicator hit extremes.
Image Source: CNN
Markets Discount Future Earnings
A common mistake made by amateur investors is to put too much emphasis on current earnings and not enough on future earnings. Equity markets are a forward-looking device, and as such, investors should put the most weight on future earnings. Zacks Consensus S&P 500 Estimates suggest healthy EPS growth into 2024.
Image Source: Zacks Investment Research
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2024 Gameplan: 5 Rules to Find Success
Wall Street: Expect the Unexpected
2023’s version of Wall Street teaches us the repeated lesson to expect the unexpected in equity markets. Equity markets are rooted in the inherent complexity and unpredictability of financial systems. Markets are influenced by a myriad of factors, including economic indicators, geopolitical events, and human behavior, making them susceptible to sudden and unforeseen changes. Attempting to predict these fluctuations with absolute certainty is challenging.
“Simplicity is the Ultimate Sophistication”
Why do some of the brightest minds, like doctors and lawyers, often underperform their peers? While intelligence is helpful on Wall Street, it can also be a double-edged sword because it leads to overthinking and “paralysis by analysis.” Breaking down markets to their simplest form can help investors by providing clarity, facilitating better understanding, and aiding decision-making. Below are five, simple but powerful rules to follow in 2024 to achieve profitability:
“Don’t Fight the Fed”
Monetary policy, set by the US Federal Reserve, influences liquidity in the financial system, which, in turn, impacts equity markets. When the Fed lowers interest rates, they increase the availability of money and credit. This added liquidity encourages borrowing, spending, and investing. The best way to track the Fed is to look at the CME FedWatch tool. Currently, the FedWatch tool predicts that the Fed is done hiking interest rates and will ease rates by May 2024.
Image Source: CME Group
Strength Begets Strength
Newton’s First Law of Motion states, “an object in motion stays in motion...”. According to the data, Newton’s First Law also applies to equity markets. Analyst Ryan Detrick points out that “This month will go down as one of the best ever for the S&P 500. (+8.5%). Did you know that after previous months that gained >8%, continued strong returns were common?” Historical returns show us that a year later the S&P 500 was higher 90% of the time and up 15.8% on average.
Image Source: Ryan Detrick, Carson Research
Be Open Minded
The concept of being in the interpreting game rather than the predicting game emphasizes that instead of trying to foresee specific market movements, investors should focus on interpreting available information and adapting their strategies accordingly. In other words, try to have an open, unbiased frame of mind. After the drubbing tech stocks took in 2022, few expected them to outperform the way they did in 2023. Could the market once again fool the masses and drive dramatic rallies in beaten-down sectors like the Nasdaq Biotech ETF ((IBB - Free Report) ), Russell 2000 Index ((IWM - Free Report) ), and the Regional Banking ETF ((KRE - Free Report) )? Recent relative price strength suggests that this is likely to occur.
Image Source: TradingView
Fade the Masses
George S Patton famously said,“If everyone is thinking alike, then someone isn’t thinking.” On Wall Street, the madness of crowds cannot be understated. In 2023, the market reversed course in the opposite direction each time the CNN Fear/Greed Sentiment Indicator hit extremes.
Image Source: CNN
Markets Discount Future Earnings
A common mistake made by amateur investors is to put too much emphasis on current earnings and not enough on future earnings. Equity markets are a forward-looking device, and as such, investors should put the most weight on future earnings. Zacks Consensus S&P 500 Estimates suggest healthy EPS growth into 2024.
Image Source: Zacks Investment Research