What Will Perform Best in 2024? (EP.340)

Episode Summary

Executive Summary: The episode is a year-end, wide-ranging conversation mixing holiday banter with a substantive review of inflation, recession fears, market breadth, index-fund debates, housing trends, crypto adoption, and consumer sentiment. The hosts argue 2023 was better than widely expected, that recession and inflation risks were overstated, and that market participation remains healthier and broader than many critics admit.

Main Topics: Year-end reflections and holiday banter (Priority: 3/5): The hosts open with Christmas updates, family logistics, kids’ gifts, holiday movies, and the oddity of the final week of trading. This sets a relaxed tone while touching on broader themes of consumer behavior and seasonality. Inflation’s decline and the limits of recession analogies (Priority: 5/5): They discuss how core PCE has cooled to around target and push back on 1970s-style inflation analogies, arguing the post-WWII disinflation pattern is a better fit. They emphasize how hard it is to forecast inflation from only a handful of historical examples. Market performance, breadth, and the case against index-fund panic (Priority: 5/5): The conversation highlights how the S&P 500 and Nasdaq have both risen strongly over three years, Amazon has only barely beaten the S&P over five years, and big-name drawdowns show that index funds are not simply propping up prices. They also cite improving earnings breadth. Investor psychology, optimism, and the value of staying invested (Priority: 4/5): Listener emails prompt discussion of why optimism can feel uncomfortable after a strong rally, but the hosts reiterate that investing was difficult in 2022-2023 and that long-term discipline matters more than timing. They revisit the ‘Bob, the world’s worst market timer’ lesson. Housing affordability, renting, and real estate activity (Priority: 4/5): They note signs that housing activity is bottoming as rates ease, discuss the rise of high-income renters and single-family rentals, and observe that some consumers are opting for flexibility rather than ownership in expensive markets. Crypto, leverage, and mainstreaming of financial products (Priority: 4/5): The hosts talk about Bitcoin, stablecoin research, leveraged ETFs, and the risks of holding leveraged funds. They frame crypto as increasingly mainstream but still driven by FOMO and emotional extremes rather than fundamentals. Consumer sentiment, tipping, and social-media pressure (Priority: 3/5): They explore why survey sentiment remains weak despite solid economic data, considering social media, comparison culture, and tipping pressure as possible contributors to pessimism and financial stress.

Key Arguments: Inflation is much closer to normal than many people think, with core PCE near the Fed’s target and disinflation looking more like a post-WWII reopening adjustment than a 1970s-style spiral. Historical analogies are limited because there are only a couple of major inflation regimes in the last 70 years, so people should be cautious about overfitting charts to the present. The market did not just rise because of passive index-fund flows; major constituents experienced huge drawdowns, and active managers and retirement contributions also matter for price formation. Investing was not easy in 2022-2023, so a strong rebound should be viewed as relief rather than irrational exuberance. Broader market participation is improving, with earnings breadth widening beyond the mega-cap tech leaders. Housing may be past its worst phase, as lower rates are bringing owners back into the market and creating more activity. High-income renting is becoming a meaningful trend, especially where ownership is expensive and flexibility/amenities are attractive. Leveraged ETFs are trading tools, not buy-and-hold vehicles, because volatility decay can overwhelm returns even when the underlying index is flat or rising. Crypto’s appeal is heavily behavioral; Bitcoin can work as intended even if it has limited everyday use beyond transfer and store-of-value narratives. Young people’s life satisfaction may be depressed by social comparison, social media, and omnipresent financial/status pressure.

Data Points: Core PCE annualized rate over past six months: 1.87% - Used to argue inflation is essentially at the Fed’s target. 2023 prediction recap score: 5 wins, 5 losses, 1 tie - Michael’s recap of his 2023 market predictions. S&P 500 and Nasdaq performance over three years: Both up roughly 35% - Shows tech did not completely outpace the broader market over that window. Amazon performance over five years: Barely beat the S&P 500 - Illustrates that even mega-cap winners did not always massively outperform the index. NVIDIA decline: Down 70% last year - Example used to show how index constituents can suffer major drawdowns. Facebook decline: Down 70% - Another example used to rebut claims that indexes are simply propped up. Apple drawdowns: Two separate 30% crashes in the last 3-4 years - Used to show volatility among the largest index holdings. Equal-weight S&P 500 ticker explanation: RSP stands for RideX S&P - Reader explanation of why the ETF ticker differs from expectation. Earnings breadth: Back above 60% - Bloomberg/Gina Martin Adams chart suggesting improving equity breadth. Bitcoin poll share: More than one-third / 34% voted Bitcoin as best performer for 2024 - Compound audience poll on expected 2024 asset-class performance. Recession forecast consensus: 85% of economists predicted a recession in 2023 - Financial Times poll cited to show how consensus missed the economy’s outcome. U.S. recession search spike: 2022 search interest exceeded 2008 and 2020 - Google search data used to show recession fear was extremely elevated. U.S. recession frequency since 2010: Economy in recession 1% of the time; about two months - Used to emphasize how rare recessions have been recently. Periods of recession since 1957: 34 recessions since 1957 - Chart comparing recession and expansion eras in the U.S. Front-row/homeowner selling interest: Double-digit annual increase - Redfin data suggesting housing activity is improving. New sale listings: Up 9% from a year ago - Largest annual increase since July 2021, indicating more supply coming back. Renter households with incomes over $1 million: 4,453 in 2022 - Wall Street Journal story on ‘forever renters.’ Growth in millionaire renter households since 2017: 4x as many - Shows rapid growth in high-income renting. Growth in renters earning $200,000+ since 2010: Up fourfold - Another sign of affluent rental demand. Homeownership rates: U.S. 64%, Brazil over 70%, India 87%, China 89% - Global comparison discussed in the housing segment. Bird funding raised: $916 million - Scooter company discussed in the context of bankruptcy. 12th grader satisfaction with life: Downward trend since 1976 - Survey data used to illustrate declining youth well-being. 12th grader satisfaction with parents: Upward trend since 1976 - Contrasted with declining life satisfaction. AirPods/Peacock subscription: $4.99 per month - A complaint about a recurring Peacock charge. Spring break airfare: Prices going down and down - Anecdotal observation used as evidence of easing consumer prices.

Pivotal Quotes: "This is taking out the more volatile components. Annual rate of 1.87 of the past six months, according to Renaissance macro. That’s, it’s fed target. It’s here." — Michael Batnick: Discussion of core PCE inflation cooling to the Fed’s target area. "If you’re worried markets are expensive, I’ve been saying for a long time, buy value stocks, buy small caps, buy international stocks, buy high quality, buy dividend, whatever. All that stuff is way, way cheaper than tech stocks." — Ben Carlson: Advice to investors worried about elevated valuations in mega-cap tech. "The easy money has been made." — Ben Carlson: Rebuttal to the idea that investing has been easy after the 2023 rally; used to frame how difficult prior years were.

Implications: Listeners should expect continued debate over inflation, rates, and market breadth, but the hosts’ message is that recession fear was overstated and disciplined diversification still matters. For markets, broader participation and easier housing conditions could support a healthier 2024.