2024 Q1 Market Commentary
Happy New Year! We hope everyone had a wonderful holiday season!
2023 was quite the year. At its outset, 100% of economists were predicting that the U.S. would enter a recession. The U.S. economy defied all expectations and grew all year, and the stock market responded in kind with strong double-digit gains. But 2023 was far from a smooth and easy ride. A regional banking crisis sparked fears of a broader financial contagion, debt ceiling drama, sharply rising interest rates triggered a market correction, and another war broke out. There were plenty of bricks in the wall of worry trying to throw investors off course, but patience and a steady hand paid off. As we look ahead, we wanted to provide our outlook going forward into 2024:
So why didn’t the U.S. fall into recession in 2023, as so many pundits predicted? Are we in for one in 2024? The recession did happen, just not all at once. Over the past year and a half, different economic sectors experienced downturns at different times, a phenomenon economists call a “rolling recession.” Thanks to this rare event, it’s possible the U.S. won’t experience a traditional reccession this year either, despite the burden of high inflation and higher interest rates. For example, residential housing contracted sharply after the Federal Reserve started aggressively raising interest rates. At one point in 2022, existing home sales tumbled nearly 40%. Now there are signs that the housing market is recovering. In 2022, we saw the semiconductor Index drop 47%. Now at the end of 2023, the index hit all-time highs. Other industries such as oil and travel experienced similar contractions and rebounds.
Company Earnings Rebound in 2024:
It is our opinion that over the long term, stock prices and valuations are ultimately driven by two factors: (1) Company Earnings and (2) Interest Rates.
1. Company Earnings: If companies continue to grow and increase earnings, stock prices will ultimately increase. In the U.S., Wall Street analysts expect earnings for companies in the S&P 500 Index to rise more than 11% in 2024, based on consensus data compiled by FactSet. Given that 2023 was a difficult year for earnings, it’s logical to expect an earnings rebound in 2024, which could provide a runway for stocks to head higher. Several risks however could result in substantial earnings revisions, including sluggish consumer spending in the face of persistent inflation, slowing economic growth in Europe and China, and rising geopolitical risk from the wars in Ukraine and Israel.
2. Interest Rates: Prices for most asset classes (stocks, bonds, and real estate) are tied to the interest rate on government securities such as U.S. Treasury bonds. Generally speaking, if interest rates increase, the valuation of stocks and bonds will go down. Likewise, if interest rates decrease, the valuation of these items will go up. This is why all eyes are currently on the Federal Reserve. If they lower interest rates, prices will go up. This is one of the reasons the stock market rallied these past few months, the Fed is expected to lower rates this year.
In their December meeting, the Fed indicated that interest rate cuts were possible this year, however provided no definitive indication of when. With this lack of clarity, we would not be surprised to see markets fall into correction territory this quarter. A correction is defined as a decrease of at least 10%, but less than 20% from the most recent high. These corrections are normal and a natural part of market cycles. We do believe there will be a rate cut in the first half of 2024, which could serve as a positive catalyst for the market. However, if the risks toward company earnings mentioned above do come to fruition, we believe this will prompt the Federal Reserve to cut interest rates sooner than expected, thus propelling stock and bond prices higher.
A window of opportunity for moving cash off the sidelines
Assuming most central banks are done raising rates, that presents an opportunity for investors to get off the sidelines. The exodus from stock and bond markets into cash over the past few years was understandable, but those who remain uninvested may miss out on an opportunity to position their portfolios for long-term success. Historically speaking, the time between the end of a rate-hiking cycle and the initial rate cut has signaled a crucial opportunity for investors to redeploy cash into stocks and bonds. In the past, that “window” has lasted an average of 10 months.
Following the last four Fed Rate Hike cycles, stocks and bonds greatly outpaced U.S. 3-month Treasury bill (Cash & Money Market) returns in the first year after the last Fed hike. Additionally, the interest for those cash-like investments, fell rapidly, declining by an average of 2.5% in the 18 months after the last Fed hike. We discussed this circumstance in last quarter’s Market Commentary and it is exactly what happened at the end of last year.
We believe rate cuts will also result in a more inclusive market. 2023 was the year of narrow market focus, with most of the returns being generated from the “Magnificent 7” (AAPL, GOOGL, MSFT, AMZN, META, TSLA, and NVDA). 2024, however, should provide many more opportunities for returns across more asset classes and sectors, not just “big tech”.
2024 Market Commentary continued…
We believe the markets will remain volatile in the first quarter of 2024. Uncertainty around Fed policy will be the main driver. Additionally, the markets have been historically more volatile during the Primaries (the first 5 months) of an election year. Markets, however, have tended to bounce back and return to an upward trajectory after the Primaries end.
Rather than trying to time a market rebound, a dollar-cost averaging strategy in which investors systematically invest equal amounts at regular intervals is a more productive strategy. It is important to view corrections as buying opportunities, especially if the time horizon for those invested funds is long-term.
You can be confident that we’ll continue to monitor economic conditions and let you know if there’s anything we need to change or address. Between an upcoming election, wars in Ukraine and Israel, and potential worsening tensions between U.S. and China, there is no doubt that there will be a lot of “noise” in the media. Now more than ever we cannot let today’s headlines distract ourselves from tomorrow’s goals.
If you have questions or concerns, we’re always available to talk. Thank you for your continued trust and partnership and we wish each and everyone a healthy and prosperous 2024!