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!
4th Quarter 2023 Commentary & 2024 Outlook
Stock Market Update
Stocks climbed a wall of worry for most of 2023 and far exceeded even the most optimistic forecasts. First, investors were worried about a regional bank crisis, then they were concerned about the Fed raising rates too aggressively, and finally, fears about an imminent recession. But none of these fears materialized. The economy continued to grow at an annual rate of 3%, unemployment stayed below 4%, and the S&P 500 rose 24% in 2023.
Most of the gains in stocks in 2023 came from just seven companies, known as the “Magnificent Seven”: Apple, Amazon, Alphabet, Meta Platforms, Microsoft, Nvidia, and Tesla. As a group, these stocks grew 111% in 2023 and now account for about 1/3 of the S&P 500 performance.
Additional fuel for 2024 could come from the $6 trillion stash of cash sitting in money markets as well as hedge funds who have bet against this market all year and are now chasing returns and trying to catch up. Corporate earnings in 2024 could see a boost if interest rates decline, thus making their future corporate earnings worth more and justifying higher stock prices.
Economic Update
Economic conditions have remained strong largely because of consumer spending and the massive amount of stimulus that has been injected into the economy since Covid. In addition, since the beginning of 2020, $43 trillion of wealth has been created through higher real estate values, stocks, etc. The combination of these factors has allowed consumers to continue spending in the face of higher interest rates.
However, the risks of recession remain. Consumers have burned through most of their excess savings, and there are some signs of stress with delinquencies on credit cards and car loans spiking. In 2024, it is unlikely that consumer spending will be able to contribute to growth like we saw in 2023. In addition, job growth has slowed and businesses are feeling the effects of higher interest rates and capital costs. Commercial Chapter 11 bankruptcy filings shot up by 72% in 2023 from the previous year!
Bond Market Update
We believe interest rates have peaked and the Fed has completed its tightening cycle. It’s possible the Fed could start cutting rates in 2024, which should be a positive driver for the economy, housing, and stock and bond markets. Most economists now believe the chances of a recession in the next 12 months is 50% or less, according to a December survey from the National Association for Business Economics. Future rate cuts by the Fed should help offset any economic soft landing or mild recession.
Investment Considerations
We are optimistic heading into 2024 due to the new industrial revolution brought on by artificial intelligence. Businesses are beginning to adapt and incorporate this new technology beyond just the Magnificent Seven, which have been the primary beneficiaries thus far.
In client portfolios we are still emphasizing lower risk dividend growth and value stocks. In 2024 we could see a “rally of the rest” where more stocks participate in market gains beyond the Magnificent Seven. If interest rates decline this year, inflation remains stable, and the economy doesn’t slide into a recession, we would expect to see a boost to laggards like healthcare, rising dividend stocks, utilities, REITs, small-cap companies, and value stocks.
In bond portfolios, we have been locking in higher rates by converting money market funds and cash to bonds and CDs for clients with time horizons longer than 1-2 years. We have also kept credit quality high, and bond maturities in the short to intermediate term range to provide stability and protection in bond portfolios.
The Bottom Line…
2023 was a big surprise to the upside, and we are still optimistic looking ahead to 2024, despite the risks of a recession.
