If you are an investor, you might be wondering what the stock market will do in 2024. Will it continue the strong performance of 2023, or will it face a downturn? While no one can know the future for sure, there are some historical patterns and principles that can help us make an educated guess.

One of the most important concepts in finance is the Net Present Value (NPV), which tells us how much a future cash flow is worth today. NPV is based on the idea that money today is worth more than money tomorrow, because we can invest it and earn interest. The higher the interest rate, the lower the NPV of a future cash flow.

Using NPV, we can compare different investment projects and choose the ones that maximize the value of our firm. For example, if we have two projects that cost the same amount of money, but one has a higher NPV than the other, we should choose the one with the higher NPV.

But how does NPV relate to the stock market? Well, the stock market is essentially a collection of investment projects, each with its own NPV. The price of a stock reflects the NPV of the expected future cash flows from that company. Therefore, if we want to predict the stock market, we need to estimate the NPV of the market as a whole.

One way to do that is to look at the historical returns of the market and use them as a guide. For instance, we can see that most years are up years for the U.S. stock market, with a positive real return in roughly seven out of ten years since 1900. We can also see that the market tends to have larger positive returns following a big down year (>20% decline) than in all other years. This suggests that the market has some momentum, or tendency to continue in the same direction.

Based on this historical evidence, we can make a reasonable prediction that 2024 will be an up year for the stock market, since 2023 was a big up year (>20% increase). In fact, the average 1-year return following a big up year is 11%, compared with just 7% in all other years. Of course, this is not a guarantee, but a probability based on past data.

However, this momentum effect does not last forever. If we look at the longer-term returns of the market, we can see that the distribution of 5-year returns following a big up year is nearly identical to the 5-year returns among all other years. This means that any short-term advantage from a big up year fades away over time. Therefore, we should not expect the market to keep rising indefinitely, but rather to face some corrections and fluctuations along the way.

What could cause the next market decline? It could be anything that is unexpected and negative, such as a geopolitical event, a climate catastrophe, or another supply chain crisis. But, whatever it is, it will be hard to predict ahead of time. If it were easy, then the market would already be pricing it in. The best we can do is to be prepared for any scenario and adjust our strategy accordingly.

The bottom line is that predicting the stock market is not an exact science, but a matter of probabilities and expectations. History can be a useful guide, but not a crystal ball. The most successful investors are not those who try to time the market, but those who follow a simple and consistent approach: Just Keep Buying. By doing so, they take advantage of the long-term growth of the market and avoid the pitfalls of emotional and irrational decisions. This is the strategy that I have been following since 2017, and it has served me well through the ups and downs of the market. I hope it will serve you well too.

Happy investing, Happy New Year, and thank you for reading!