On December 20, 2023, I published my predictions for the coming year. My 2024 target for the S&P 500 was 5,865…
My target was absolutely the most bullish of any Wall Street strategist or newsletter guru.
My target is also proving to be the most accurate. Seems like I should be getting an award at an honorary luncheon or something…
Now obviously, target price predictions for an index to be achieved 12 months down the road should taken with a grain of salt. Anything can happen to send the market into a funk. And if you’d told me that fighting would still be raging in the Middle East and Ukraine, I might’ve been a little less bullish…
But not much. Because the whole secret to making accurate forecasts can be summed up with the words “The trend is your friend.”
Trends have inertia. They continue until acted upon by an outside force. People mostly go about their day-to-day. They go to work, buy groceries and gas, contribute to their 401k plans, take vacations…
And American corporations are very good at increasing their efficiency and selling more stuff, so earnings tend to grow.
In fact, it was my belief that U.S companies are better managed and therefore better at growing earnings than most strategists give them credit for which led to my bullish 5,865 prediction target for the S&P 500 this year.
If the 2022 spike in inflation and record-setting interest hikes in 2023 couldn’t dent earnings and send unemployment higher, that’s a pretty good sign that companies are pushing the right buttons.
The Secret of the Black Swan
Of course, there are times when this whole virtuous cycle gets interrupted by a shock to the system. But that’s why we call these shocks “black swans.” They are rare. They are the exception, not the rule.
The irony is that there will be shocks to the system. At some point, a big bad Black Swan will splash down on the pond and spread ripples to every edge…
Another irony is that the stock market is more vulnerable to some Black Swan event after a prolonged rally when valuations and bullishness are high. For one, investors have more to lose. Once a sell-off gets going, it can quickly turn into a panic as the switch flips from greed to fear and people start to imagine a 20% or 30% chunk getting taken out of their account balances.
Plus, it is at the tail end of bull markets, after a long string of new highs, that investors start doing dumb things. Like using margin to leverage up and bet the farm on triple leveraged ETFs that promise triple the gains, but can also bite with triple the losses.
Bloomberg reports that 164 derivatives-based ETFs that promise payouts of as much as 100% have launched this year. These ETFs trade options contracts to make money, which may work fine when things are going well. But unlike stocks, all options contracts eventually expire and become worth zero.
ETFs are pitched as a safe investment because they spread risk to a whole group of stocks. I wonder what investors will think when they lose it all on an ETF they don’t really understand.
These ETFs currently have $300 billion under “management,” up 50% in the last year.
Social media influencers are being paid to tout these ETFs.
One ETF expert told Bloomberg “The product proliferation problem is enormous and mostly to investors’ detriment. To me, it feels like a free-for-all.”
The Chief Revenue Officer at one of these derivatives-based ETF companies recently said: “There is a breaking down of traditional barriers because ETFs are direct-to-consumer products…The minute I launch a product, every trader at home can buy it. It’s like a sneaker, it’s like a potato chip.”
As if breaking traditional barriers and selling complex trading products as easily as potato chips is a good thing.
What could possibly go wrong?
These crazy derivatives ETFs probably aren’t the Black Swan that will end this bull market. But I can tell there will be a reckoning for them – and the companies that sponsor them – at some point.
I can also tell you the more reckless investors become as the market keeps hitting new highs, the less bullish my 2025 target for the S&P 500 will be.
Cheers,
Briton Ryle
Chief Investment Strategist
Outsider Club
X/Twitter: https://twitter.com/BritonRyle
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