Will the Stock Market Crash in 2024? 6 Risk Factors | Investing

Anxiety is rising in the U.S. stock market, even as market gains accumulate.

Stubbornly high inflation may be lowering the Federal Reserve’s likelihood of curbing interest rates in the immediate future. Meanwhile, consumers are battling soaring grocery bills and sky-high home and rental prices, leaving less cash in their wallets for spending.

Still, the stock market rolls on. “U.S. equities have seen a tremendous run since late October 2023,” says Peter C. Earle, senior economist at the American Institute for Economic Research. Between Oct. 27 and March 28, the S&P 500 gained 28%, the Nasdaq added 30% and the Dow Jones Industrial Average rose by 23%.

Keeping that momentum rolling could prove difficult going forward.

“For an economy in which disinflation is slowing, employment may be starting to crack and consumer activity seems to be softening amid tighter credit, the depletion of pandemic savings and growing financial distress (rising late payments and delinquencies). It sure looks like the market is pricing for perfection over the next 12-plus months,” Earle notes.

Is that enough for the market to slide downward in 2024? Here are six factors that make the scenario more likely:

“From a common-sense viewpoint, the equity markets came very far, very fast in 2023 and early 2024,” says Hugh Johnson, chairman emeritus of Graypoint LLC in Albany, New York. “In quantifying this risk, essentially, the S&P 500 is 14% above the level it should average in the current quarter, 6.7% above the level it should average in Q4 2024 and 0.5% above the level it should average in Q4 2025.”

In addition, financial market performance has shifted toward defense over the past three weeks. “Investors tend to get it right. That includes sector performance (utilities, consumer staples), capitalization performance (large-cap outperformance) and style performance, with value again outperforming growth,” Johnson says.

Big technology companies with exposure to AI, such as Nvidia Corp. (ticker: NVDA), have provided upside support to stocks, but that may be unsustainable.

“Nvidia’s performance in the first three months has moved it to the third-largest stock in the S&P 500 and was a large part of the market’s recent broad rally,” says Mitch Bodenmiller, portfolio manager and research analyst for Buckingham Advisors in Dayton, Ohio. “Should Nvidia or other ‘Magnificent 7’ stocks begin to miss earnings estimates or issue weaker-than-expected guidance, it would likely generate a pullback from current levels.”

Another big issue vexing investors is that critical market indicators are out of whack.

“Stock market investors, whether retail or institutional, are seeing the same things the rest of us are seeing,” Earle says. “With the U.S. economy looking tepid, they must be pinning their hopes on the Fed sticking to cutting rates three times this year.”

Earle says it’s “somewhat ironic” that even if the Fed lowers rates three times this year, the actual economic impact would be mostly psychological.

“Monetary policy lags are long and variable, so taking rates down 75 basis points would signal the Fed’s shift to an expansionary and accommodating stance,” Earle says. “The actual impact of loosening monetary conditions, even if the Fed began cutting in June 2024, would likely not hit until late in the year, and more likely in 2025.”

“It’s strange that the price of West Texas Intermediate is lower than it was in the weeks after Oct. 7, even with Houthi attacks in the Red Sea continuing and saber-rattling between NATO and Russia over Ukraine mounting,” Earle notes. “The U.S. is also facing a contentious election in November, with each side likely to disavow the outcome if their candidate doesn’t win. All of that uncertainty is why stock markets have hit all-time highs, and gold has as well.”

Earle cites gold hitting a record high of $2,186 per ounce on March 20 and the S&P 500 hitting a record high of 5,261.10 the next day. Gold has continued its ascent, hitting another record high of $2,265.73 on April 1.

“The prices of those assets tell two completely different stories,” he adds. “A year from now, and maybe sooner, we’ll know which of those implied forecasts was more accurate.”

U.S. credit card delinquencies are on the rise, as consumers turn to credit to cover bills like utilities, cell phones, mortgages and rent.

Aggregate U.S. household debt rose by $212 billion in the fourth quarter of 2023, according to the New York Federal Reserve. That’s up 1.2% from the previous quarter. Household debt balances are up to $17.5 trillion, representing a $3.4 trillion jump from 2019, just before the COVID-19 pandemic.

Credit card debt is exceptionally high, clocking in at $1.1 trillion in Q4, the Fed reported. Simultaneously, the annualized credit card delinquency rate stands at 8.5%, compared to a 3.1% delinquency rate on all outstanding household debt.

“The burgeoning ‘living beyond means’ character of the consumer can most easily be seen when looking at consumers’ revolving credit … and the associated increase in serious credit card delinquencies,” Charles Schwab investment strategists Liz Ann Sonders and Kevin Gordon wrote in a recent research report. “Those delinquencies are particularly acute among younger borrowers. For now, healthy wage growth has kept the ratio of credit card debt to compensation historically low, but further weakening of wage growth will cause the ratio to climb.”

Downbeat consumer sentiment could weigh heavily on stocks, given that consumer spending accounts for about 70% of GDP, Sonders and Gordon noted.

U.S. inflation numbers are unlikely to continue getting progressively better and better, as they did in 2023.

“That will provide enough reason for the Federal Reserve to back away from making three interest rate cuts in 2024 and four cuts in 2025,” Johnson says. “There’s a solid chance that we see renewed weakness in the economic and earnings numbers as we move through 2024. The deepest concern is that the inflation numbers have started to renew their move higher.”

Bodenmiller agrees with that sentiment.

“Inflation data continues to be a major market catalyst,” he says. “Should inflation data come in higher than anticipated, the Fed may not cut rates as expected, which could slow the market rally.”

The economic toll of the nation’s battle with COVID-19 has been pegged at about $5 trillion and counting, which represents about a quarter of its gross domestic product. In total, the U.S. national debt is a whopping $33 trillion, increasing by $1 trillion every 100 days, according to the Committee for a Responsible Federal Budget.

“2024 has opened with encouraging economic signs, but they could be fleeting,” says Ron Surz, president of PPCA Inc. and Target Date Solutions in San Clemente, California, and co-host of an online series called the “Baby Boomer Investment Show.” Surz notes that there’s a $3.5 trillion difference between the M2, or the Fed’s estimate of the nation’s money supply, and the amount that Surz estimates is needed to run the economy.

“Currently, $3.5 trillion represents too much money in circulation,” he says. “That will cause ‘cost-push’ inflation on top of our current ‘demand-pull’ inflation.”

Fighting inflation by quantitative tightening is bankrupting the Fed with substantial operating losses, Surz says. In January, the Fed reported an operating loss of $114.3 billion for 2023. “It’s ugly. The Fed ‘pays’ for these losses with a bookkeeping entry for ‘deferred assets,’ which is basically an IOU to itself, and there’s no way out for the Fed,” Surz says.

Compounding mounting economic problems is the possibility of more U.S. banks failing and the abandonment of office buildings and brick-and-mortar stores.

“Consequently, owners are going out of business and defaulting on their loans,” Surz notes. “Compounding these banking problems, depositors withdraw their savings because they earn higher interest on CDs and money market funds.”

“While markets are at all-time highs, it can appear like an opportune time to sell off stocks,” Bodenmiller says. “The best strategy is to stay invested in stocks, with money allocated for long-term growth, and avoid trying to time the market.”

Despite some serious red flags, investing according to your specific risk tolerance is far more important.

“If an investor feels nervous about how much of their wealth is tied up in the stock market, it may be appropriate to assess whether their overall allocation is suitable for them,” Bodenmiller notes. “The proper risk tolerance for an investor is an allocation they can stick with when a market pullback takes place.”

The biggest mistake investors can make right now is trying to time the market.

“That’s more akin to speculation than investing,” Bodenmiller adds. “Trying to predict market highs or lows is one of the most common errors individual investors make, and it more often than not leads to returns that fall far short of those of investors who have properly allocated investment portfolios and the patience to ride out short-term market volatility.”