Few investors are complaining about the stock market these days — not with the S&P 500 up 20.1% this year as of Nov. 1.
Yet market watchers suggest a shift could be on the way in late 2024, with a host of domestic and international issues threatening to erupt before the end of the year, which could roil the U.S. stock market.
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“Overall, there’s no obvious sign of a major market crash on the horizon, but a lot of factors could still shake things up,” says Joseph Camberato, CEO at National Business Capital, a fintech firm in Hauppauge, New York. “If global conflicts escalate or we see big disruptions around the election, it could affect stability. Right now, the market’s holding up, but investors must stay aware of a mix of uncertainty.”
As investors look for red flags that the markets may shift downward, economic and investment experts say these seven risk factors could be in play:
— Stubborn inflation.
— The Fed’s big decisions.
— Consumer anxiety.
— Dicey stock pricing.
— Uncertain guidance.
— Ongoing military conflicts.
— Debt domino effect.
Stubborn Inflation
Inflation and fuel costs remain two key areas to watch right now. “If inflation stays in check and fuel prices don’t surge, it’s easier for the economy to keep growing,” Camberato says. “But if consumer spending slows, companies that rely on strong consumer demand could see their earnings slip.”
The biggest risk would be a “serious escalation” in global tensions or a major economic shock, he adds. “The job market and consumer spending are still solid, but any big drop in either could be a red flag.”
The Fed’s Big Decisions
The Federal Reserve’s interest rate dance is on a tightrope, and that could take a toll on the markets. For now, a quarter-point rate cut is expected at the Fed’s policy meeting on Nov. 7.
“Raising rates too aggressively could stifle economic growth, but not raising them enough risks reigniting inflation,” says Edward Corona, publisher of the Options Oracle newsletter. “This tightrope walk creates uncertainty, which can spook investors.”
Consumer Anxiety
Consumer spending power and bad-debt defaults will be concerns into 2025, says Vince Stanzione, CEO and founder of First Information, a Monaco-based financial publishing firm.
“U.S. markets are still very driven by consumer spending, and if they are tapped out and credit conditions tighten, this will have an adverse effect on markets,” Stanzione says. “The auto market and repossession rate should be watched closely.”
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Dicey Stock Pricing
The stock market presents significant challenges that make it difficult to maintain a bullish outlook.
“Large-cap stocks appear overvalued, carrying excessive weight in portfolios, which raises concerns about their future performance,” says Michael Kodari, CEO of Kosec in Sydney, Australia. “Mid-cap stocks are trading at extremely high premiums, and this year’s institutional shift toward perceived value stocks, those at COVID-era lows, has pushed valuations to unsustainable levels.”
For example, Kodari cites companies like Cava Group Inc. (ticker: CAVA), which is trading at a price-to-earnings ratio of about 366 as of Nov. 4. “Such valuations are hard to justify, especially when small-cap stocks have already seen substantial gains of 50% to 100% year to date,” he says. “This surge makes it challenging to find upside potential without taking significant risk. Investing in exchange-traded funds or index funds doesn’t necessarily mitigate this issue, as excessive liquidity and weighting distort market valuations across the board.”
Uncertain Guidance
The macroeconomic environment adds another layer of complexity. “Large companies are issuing poor guidance extending into 2025, citing concerns over a weakening consumer base,” Kodari says. “This scenario could trigger a domino effect of staggered returns, particularly impacting mid-cap companies currently perceived as growth opportunities.”
If these companies begin to see their earnings dissipate in the short term, investors may witness significant liquidity exiting these stocks as investors look to reduce risk amid uncertainty, says Greg Luken, founder of Luken Investment Analytics in Franklin, Tennessee.
“Given these dynamics, predicting a bullish outcome is challenging,” he adds. “A neutral stance might be more appropriate at this juncture, focusing on waiting for potential market corrections before making substantial investment decisions.”
Ongoing Military Conflicts
Charlie Ashley, a portfolio manager at New York-based Catalyst Funds, is monitoring geopolitical risks as tensions have increased around the globe.
“A wider escalation of the wars in Ukraine and the Middle East, or a Chinese invasion of Taiwan, has the potential to inject substantial volatility into the stock market,” he says.
Debt Domino Effect
If inflation takes a turn, rising interest rates could make it harder for companies and governments to service their debt. “If defaults start piling up, it could lead to a financial crisis,” Corona says.
As of Nov. 4, the national debt stood at a whopping $35.95 trillion. Meanwhile, global public debt is rising, too, at about $100 trillion, according to the International Monetary Fund. The IMF estimates that in an adverse scenario, global debt could be 20% higher than baseline projections by 2027, which could lead to significant economic upheaval globally.
Smart Moves for Investors
The savviest move investors can make is to stay cool and keep rising emotions at bay.
“The biggest mistake investors make when shifting investments is to make that decision based on an emotional bias,” Luken says. “Research shows that emotional decision-making is the No. 1 cause for investor underperformance.”
Timing matters, too. “Making a decision based on an election, a political party, a season of the year or some bogeyman, like a recession (that rarely shows up as often as predicted), can be very expensive,” Luken says. “That is why a quantitative approach is so important.”
Where should you land right now if you have new money to invest? Luken advises leveraging risk and supply-and-demand signals. “Based on what we’re seeing, it tells us not to buy small stocks, not to buy developed international markets and not to buy real estate,” he says. “While susceptible to a surprise, U.S. stocks and emerging markets still look like the place to be.”
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Will the Stock Market Crash in 2024? 7 Risk Factors originally appeared on usnews.com
Update 11/04/24: This story was previously published at an earlier date and has been updated with new information.
