The US major indices have performed extremely well in 2023, beating expectations from both analysts and investors alike.
While the S&P 500 broke all-time highs, uncertainty continues to loom over the economy and you may be worried about the possibility of an impending market crash in 2024.
Will the stock market crash in 2024?
Or are we in the next bull run and should only look ahead?
Truth is, no one can accurately forecast a market crash.
So, here are 5 signs of a market crash to help you identify if a crash is on the horizon.
1) Greed is High
The CNN Fear & Greed Index is a way to gauge stock market movements and whether stocks are fairly priced. The theory is grounded in the idea that excessive fear tends to drive down share prices, while too much greed has the opposite effect.
The Fear & Greed Index is a compilation of seven different indicators, each measuring different aspects of stock market behavior. These include market momentum, stock price strength, stock price breadth, put and call options, junk bond demand, market volatility, and safe haven demand.
The index tracks how much these individual indicators deviate from their averages compared to how much they normally diverge. The index gives each indicator equal weighting in calculating a score from 0 to 100, with 100 representing maximum greediness and 0 signaling maximum fear.
In October, the index was in an extreme fear position. Today, it has shifted to “Extreme Greed” after the market has had a strong month in November.
The S&P500 is currently trading at an all-time high. While what’s high can get higher, the chart below presents a perspective that greed is one of the last few sentiments felt before market starts to crash. That said, we might not be in the Delusional stage just yet.
Analysts are also turning bullish. HSBC is forecasting a near 10% increase for the FTSE All-World Index, of which the US indices form a substantial part.
Deutsche Bank anticipate that the S&P 500 will surge to a record 5,100 by the end of the next year, saying that stock valuations are not excessively high, with fair value estimated at 18x earnings and a range of 16x-20x.
Despite solid earnings growth, market perceptions remain subdued, which leaves enough room for valuations to re-rate higher. While Deutsche sees a “mild short” recession next year, it still expects earnings for companies in the S&P 500 to rise by 10%.
Goldman Sachs predicts the S&P 500 index will rise to 4700 by the end of 2024, representing a price gain of about 5% and a total return of around 6%, including dividends. This price gain factors in Goldman’s economists’ forecast for US GDP growth of 2.1% in 2024.
2) Inverted Yield Curve and High Interest Rates
The US yield curve has been inverted since July 2022. Interest rates have been hiked to 5.5%.
An inverted yield curve occurs when short-term interest rates exceed long-term rates and is one of the most reliable leading indicators of an impending recession.
Under normal circumstances, the yield curve is not inverted since debt with longer maturities typically carry higher interest rates than nearer-term ones.
Inverted yield curves are unusual since longer-term debt should carry greater risk and higher interest rates, so when they occur there are implications for consumers and investors alike.
Long term rates are lower when there are market expectations of a rate cut.
US interest rates have also increased from near 0% to 5.5% in less than two years. This higher cost of funds has severely slowed down credit growth and increased the interest burden for many companies.
For consumers, higher borrowing costs typically impact their monthly mortgage. As more funds are diverted to the mortgage, people will eventually start spending less elsewhere. The demand for goods and services will then drop, causing inflation to fall and economic growth to slow or decline.
3) Decreasing consumer confidence and spending
Consumer confidence had increased in November after three consecutive months of decline and as of December, it currently stands at 110.7 from 99.1 in October.
What does this mean?
- An indicator above 100 signals a boost in the consumers’ confidence towards the future economic situation, as a result of which they are less inclined to save, and more inclined to spend money on major purchases in the next 12 months.
- Values below 100 indicate a pessimistic attitude towards future developments in the economy, possibly resulting in a tendency to save more and consume less.
In November, consumers felt more confident about business conditions but consumers were also less optimistic about the job market
The decline trend has been attributed to Consumers being preoccupied with rising prices in general, especially for groceries and gasoline. Consumers also expressed concerns about the political situation and higher interest rates.
Although consumer confidence has fallen since peaking in 2021, the index is still hovering above the 100 point mark. This is due to the strong employment situation in the US, Consumers have proven to be resilient, continuing to spend, causing inflation to linger.
However, there are significant roadblocks ahead that could cause consumers to cut back. One of those factors is student loan payments which has resumed.
Analysts also believe that pandemic-era savings arising from $1.5 trillion in excess stimulus programs have finally run out and consumers will likely have to tighten their belt at some point.
4) Highly valued stocks
The P/E ratio of the S&P 500 index is about 30.9 times. The Nasdaq is trading at around 25.6 times. While it has to be acknowledged that the P/E ratio for an index is tough to calculate accurately, it serves as a broad estimate of the market.
The S&P 500 index is trading at more than 1 standard deviation above average now. Risk of market crashes increase significantly when it reaches 2 standard deviations and there is a perception of a bubble when valuation goes above 3 standard deviations.
5) Market volatility
The VIX Index is a measure of the expected volatility of the US stock market.
The VIX is based on the option prices of the S&P 500 Index and is calculated by combining the weighted prices of the index’s put and call options for the next 30 days.
The VIX is designed to reflect investors’ view of future US stock market volatility, in other words, how much investors think the S&P 500 Index will fluctuate in the next 30 days.
In general, VIX values of greater than 30 are considered to signal heightened volatility from increased uncertainty, risk and investor fear. VIX values below 20 generally correspond to more stable, less stressful periods in the markets.
VIX is currently at very low levels and there is a likelihood of a mean reversal.
A high VIX represents not only heightend volatility but is also linked to a stock market heading down.
Will the markets crash in 2024?
We shared 5 signs to look out for a market crash, however not all is gloomy in the US. Based on estimates, the US economy accelerated to a robust 5.2% GDP growth in 3Q23. This was attributed to consumer spending on durables as well as stronger business investments.
US’s economic growth transitioned from resilience to reacceleration in 3Q23, defying the Federal Reserve’s aggressive tightening cycle and tighter financial conditions, suggesting that the Fed needs to do even more.
On the other hand, Core PCE, a measure of inflation came down to 2.6%. On balance, it seems like the Fed can afford to pause on its rate hike but may not necessarily cut rates so quickly.
We are currently in a stage of conflicting data points.
While there are signs of a market crash, it may not be as soon as we think or even happen at all if the Federal Reserve is able to achieve its goal of cooling down inflation adequately and then quickly reversing its hawkish monetary policy stance, maintain a low level of unemployment, a robust job environment and a strong economy.