In our quarterly Economic & Market Update Newsletter, we separate the relevant from the noise, to bring you timely content that helps you on the path to and through retirement!
1st Quarter 2024 Commentary & 2024 Outlook
The economy and markets remained incredibly resilient in 2023, which has continued in the first quarter of 2024. This has been a very confusing time for investors. The economy is still on shaky ground with manufacturing in decline for over a year, and problems in real estate and other interest rate sensitive sectors. But the service sectors (which account for most of the U.S. economy) remain strong, and consumers continue to spend.
Stock Market Update
With 2024 shaping up to be a very contentious Presidential election year, we expect some volatility in the stock and bond markets. However, the Federal Reserve’s interest rate decisions will likely influence markets in 2024 more than anything. The Fed is now signaling 2-3 possible rate cuts in 2024. If the Fed can somehow orchestrate a soft-landing for the economy, and lower interest rates without spiking inflation this year, we could see stronger growth, and an acceleration of earnings, both of which should provide a boost to markets.
Looking at the stock market, the new cyclical bull market that began October 12, 2022, has risen over 46% off the lows to new all-time highs due to lower inflation, a dovish Fed, and an acceleration of earnings. Earnings growth was only 2% in 2023. But, S&P 500 earnings are projected to grow 11% in 2024 and 13% in 2025. In addition, productivity has been rising at a brisk pace. In the 4th quarter of 2023, productivity increased 2.6%. If productivity gains and earnings growth continue, stocks have room to continue higher.
This is probably one of the best times in many years to invest in high-quality value and rising dividend stocks. These stocks have been largely ignored by investors. We believe the benefits of artificial intelligence (AI) and other emerging technologies will ultimately broaden out beyond the big tech companies and benefit stocks across the board. And given the divergence in valuations, many high-quality value and rising dividend stocks are trading at attractive valuations.
Economic Update
Turning to the economy, the U.S. GDP grew 3.1% in 2023, surprising most economists who had been predicting a recession. Even the regional banking crisis and the Fed tightening cycle couldn’t keep the economy down last year. GDP is expected to grow only 2.1% in 2024, but growth could surprise once again due to infrastructure spending, increased government and business outlays, as well as stimulus from Fed interest rate cuts.
Bond Market Update
Fixed income investors are finally being rewarded with higher yields on bonds. Historically, the best time for fixed investors to invest was a few months prior to the Fed lowering rates. We believe we’re in that period now, so it’s a great time to get off the sidelines – out of cash and money markets and into longer-dated bonds.
Investment Considerations
One of the biggest risks to fixed income investors right now is reinvestment risk (i.e. having to reinvest at lower rates). When the Fed starts cutting rates, we may see short–term interest rates on savings and money market accounts drop dramatically. This could leave investors faced with the difficult task of finding attractive yields. Instead of waiting for rates to drop and missing out on opportunities, we are actively encouraging clients to lock in longer-dated maturities now while attractive rates are still available.
The Bottom Line…
Stocks have reached new all-time highs due to lower inflation and an acceleration of earnings. AI is increasing productivity and profitability which is providing a tailwind for stocks. The economy may slow, but lower interest rates should keep growth above 2% if inflation doesn’t spike. Now is the time to increase allocations to dividend and value stocks, and lock in longer dated maturities while interest rates are still elevated.
