Get your mind right for 2024

Wild swings in most asset classes have persisted since early 2020, when the markets first learned about the COVID crisis. Since then, we have experienced hyperinflation due to overly aggressive economic stimulation and an unexpected war in the world’s breadbasket, followed by government-led sanctions on energy products and an arguably prematurely forced transition toward green energy. In short, it’s been a heck of a ride. So much so that I’ve noticed the masses are geared up for another year of chaos.

Although we have normalized disarray to such an extreme that we might need to redefine the magnitude and frequency of Black Swan events, this environment is probably unsustainable. Historically, market and political volatility has always been transitory; we believe it will also be this time. Eventually, market participants will exhaust themselves and refuse to participate in the anarchy. Money market funds are paying nicely; perhaps sidelined cash will remain there for much of the year.

2024 Commodity Rallies won’t be of the 2021/2022 Variety

Producers and end users don’t want to hear this, but the 2021/2022-style commodity rallies are behind us. We might not see that type of commodity bull environment for another decade. We should acknowledge that much of the gains witnessed in commodities in 2021 through 2022 were primarily financed with stimulus dollars and made possible by aggressive speculation. Similar to the way that mostly worthless meme stocks and cryptocurrencies rallied wildly beyond any reasonable valuation, so did products like crude oil, natural gas, grains, and softs.

Unfortunately, the aftermath of the massive influx of money supply is higher prices across the board and, therefore, higher production costs for commodity producers. However, just because producers need a specific price to turn a profit doesn’t mean they will get it. In fact, history tells us we should expect the exact opposite. Crude oil producers in 2020 learned this lesson the hard way, and so did farmers and ranchers who witnessed grain and meat prices collapse after the historical rallies of the early 2010s.

Rather than focusing on input costs and relying on the markets to “do the right thing” by producers, it will be essential to focus on controlling what can be controlled, not what can’t. Commodity producers, end-users, and speculators can’t control market price. Still, they can hedge price risk, alter operations to deal with the new reality, or adjust their trading mindset to accommodate less upside volatility.

On the other hand, speculators should acknowledge that commodity prices tend to go down more than they go up. Thus, being perpetually long the sector isn’t the answer. Instead, it is generally better to be bullish only on large dips toward historic support levels.

Tamer Commodity Rallies = Tamer Inflation and Looser Monetary Policy

It could be argued that the late 2023 rally pulled forward some of the “Fed Pivot Gains” in the stock indices, but if we are right about the commodity market volatility declining in 2024, Central Bankers will have less incentive to keep rates higher for longer. Lower interest rates and the resulting lower dollar are enough to stave off a complete crisis.

Will the Fed achieve a rare soft landing and a Goldilocks economy? It seems relatively achievable. If the Fed keeps interest rates steady or begins to cut because inflation continues to decline, as opposed to doing so in defense of a weakening economy, most assets will trade firmer overall to keep the Goldilocks narrative alive.

Election Volatility

We know, we know…but what about the election? Every four years, we are convinced that this is the most important presidential election of our lifetimes. In truth, this one might be that pivotal, given the massive disconnect between parties and the general public. Nevertheless, we like to use history as a guide, and history suggests that when a sitting President is involved in the race, most of the market turmoil occurs early in the year rather than later. Further, the S&P 500 generally goes on to net double-digit gains. On the other hand, if, for some reason, the incumbent President doesn’t run in the upcoming election, the stats suggest only moderate yearly losses; uncertainty spurs volatility ahead of open field elections, but due to the strong tendency for stocks to recover post-election, regardless of the outcome the losses are often temporary. In conclusion, election years have generally been far less than catastrophic to stock investors than the current chatter suggests. Instead, election years have been a pretty good time to be invested. Even so, there is reason for concern in the coming months. Markets don’t go straight up as we have seen in recent months; when they do, there is eventually a reality check.

Don’t be Afraid of Large Dips

The S&P 500 covered a lot of ground in a short amount of time for virtually no fundamental reason (other than lower interest rates and seasonality) to end the year. Nearly all historically excessive net short positions held in the E-mini futures have been unwound during the run. This leaves the market vulnerable to profit-taking and speculative selling in the coming months. Further, as measured by CNN Money, investor sentiment has shifted from Extreme Fear in October to Extreme Greed; this is generally a sign that something has to give. However, extreme sentiment readings often take weeks or months to turn the tide. When it does, we could see a sizable equity market correction, providing the bulls with what we believe will be an attractive opportunity. According to the E-mini S&P 500 monthly chart, the market can correct to as low as 4,300 without violating the bullish chart pattern. We will be paying close attention to this price in early 2024. Happy New Year, let’s make it a good one!

*There is substantial risk of loss in trading futures and options. There are no guarantees in speculation; most people lose money trading commodities. Past performance is not indicative of future results.

Seasonality is already factored into current prices, any references to such does not indicate future market action.

**There is substantial risk of loss in trading futures and options.** These recommendations are a solicitation for entering into derivatives transactions. All known news and events have already been factored into the price of the underlying derivatives discussed. From time to time persons affiliated with Zaner, or its associated companies, may have positions in recommended and other derivatives. Past performance is not indicative of future results. The information and data in this report were obtained from sources considered reliable. Their accuracy or completeness is not guaranteed. Any decision to purchase or sell as a result of the opinions expressed in this report will be the full responsibility of the person authorizing such transaction. Seasonal tendencies are a composite of some of the more consistent commodity futures seasonals that have occurred over the past 15 or more years. There are usually underlying, fundamental circumstances that occur annually that tend to cause the futures markets to react in similar directional manner during a certain calendar year. While seasonal trends may potentially impact supply and demand in certain commodities, seasonal aspects of supply and demand have been factored into futures & options market pricing. Even if a seasonal tendency occurs in the future, it may not result in a profitable transaction as fees and the timing of the entry and liquidation may impact on the results. No representation is being made that any account has in the past, or will in the future, achieve profits using these recommendations. No representation is being made that price patterns will recur in the future.