January was a mixed month for investors as the US large cap indexes were positive for the month as the small and mid-cap indexes started the year on a negative note. Internationally, the two indexes that follow developed markets – MSCI World and MSCI EAFE – were positive while the MSCI Emerging Markets index was lower. China and Honk Kong appear to be the main issue for this index, down 8.69% and 6.86% respectively for the month. Bonds were down on modestly higher interest rates as the US Dollar and Commodities both had strong gains.
All data as of 01/31/2024, Source: Wells Fargo Investment Institute. An index is not managed and not available for direct investment. Past performance is not a guarantee of future results. [Wells Fargo Investment Institute, Inc. is a registered investment advisor and wholly-owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.]
In our Stock Market Outlook 2024 we outlined 3 themes that we believe will drive the stock market in 2024 –A stronger than expected US economy, influence of Federal Reserve Bank (The Fed) policy, and stock market volatility. If you haven’t had the chance to read it yet you should take the 5 minutes it takes to go through it so you have an understanding of why we believe these are important to investors. It can be found here.
What we want to do here is take a deeper dive into our first theme – a stronger economy than expectations – and discuss some additional factors that we feel could alter our thoughts as the year progresses.
2024 Economic Outlook Perspectives
As stated previously, we are more bullish on the economy than most observers as the economic landscape of 2024 is marked by a blend of both optimism and caution. Data from the Wells Fargo Investment Institute provides valuable insights into this dynamic environment.
The Wells Fargo analysts are anticipating a continued global economic slowdown, followed by a gradual U.S.-led recovery in the latter part of 2024. The report suggests that global earnings may face challenges in early 2024 before rebounding later in the year as the economy reaccelerates. The institute also expects U.S. Treasury yields to remain volatile in 2024, declining early on as the economic slowdown gathers momentum, but rising as the recovery evolves in the latter months of the year.
As inflation falls closer to the Fed’s 2% target, the institute expects that policymakers will cut short-term interest rates, reducing borrowing costs for households and businesses. This, and households with new purchasing power, should prompt spending, inventory rebuilding, and an economic recovery, at least into year-end 2024, and probably beyond.
While we do not disagree with this analysis, we do think that there are a number of possible positive and negative factors that also need to be considered:
Positive Economic Factors include:
The US Government Industrial Policy: Specifically, the CHIPS and Science Act, the Infrastructure Act, and the Inflation Reduction Act. These bipartisan policies aim to support U.S. industrial and technological development through market-based measures that promote research and development (R&D) and business development. This strategic focus on industrial development is something we expect to stimulate economic growth above expectations. A deeper dive into industrial policy by the Council on Foreign Relations can be found here.
Higher Interest on Savings: Another positive aspect is the potential for households to earn higher interest on their savings. High-yield savings accounts and money market accounts generally provide a much better return on investment than regular checking or low-interest savings accounts. With the Federal Reserve’s recent rate hikes, savings account rates have seen an increase, providing a stimulus for households and contributing to economic growth.
Negative Economic Factors include:
Jobs Market and Recent Layoffs: Despite continued job increases and historically low unemployment, we do have concerns about the jobs market. Several major companies have announced layoffs recently. For instance, UPS announced 12,000 layoffs due to a decline in revenue, and tech companies like Google and YouTube have also announced significant job cuts. In our opinion, these types of layoffs could potentially become a trend in 2024, impacting the jobs market negatively. The layoffs are often a result of companies focusing on efficiency and doing more with less following a year of widespread layoffs. An added “benefit” for companies reducing workforce is lower expenses that could result in better profit margins. This trend, if it continues, could pose a significant challenge to the economic outlook for 2024 as it has the potential to damped consumer confidence and consumer spending.
Federal Reserve Interest Rate Policy: The Fed is our 2nd 2024 theme and, in our opinion, policy decisions have the potential to significantly impact the stock market. At the January 31st meeting the Fed kept interest policy steady with Chairman Jay Powell putting a damper on the likelihood of a rate cut at the board’s March meeting. While we believe this decision is a prudent one, Fed Funds futures continue to expect cuts (up to 6) this year. This is not just overly aggressive in our view, but is neither likely or desired. Instead, we see a high probability of Chairman Powell doing what he says and either not cutting rates at all in 2024 or implementing one or two small cuts to adjust for lower inflation numbers. If we are correct, the cost of higher borrowing expenses at both the government and household level could weigh on the both consumers and the economy.
We remain positive on the economic outlook for 2024, but continue to have and open mind about several factors that could influence its trajectory. Our hope is that we are correct in our assessment of the positive possibilities while the negative ones do not come to fruition. Hope, of course, isn’t an investment plan.
As investors it’s important to stay informed and prepared for these evolving economic conditions as they affect both bond and equity investments. And as always, we will continue to monitor the situation and keep you informed.
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On behalf of Magellan Financial we would like to thank you for taking the time out of your busy day to take in our thoughts and opinions. If you found this helpful, please forward it on to others. If you have any questions on the materials presented, would like to be added to our email list, or would like our help with your investments, we can be contacted at 610-437-5650 or via email.
Wells Fargo Advisors Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author(s) and are not necessarily those of Wells Fargo Advisors Financial Network or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request.
Asset allocation and diversification are investment methods used to help manage risk. They do not guarantee investment returns or eliminate risk of loss including in a declining market.All investing involves risks including the possible loss of principal invested. Past performance is not a guarantee of future results.
Index returns are not fund returns. An index is unmanaged and not available for investment.
Dow Jones Industrial Average: The Dow Jones Industrial Average is a price-weighted index of 30 “blue-chip” industrial U.S. stocks.
S&P 500 Index: The S&P 500 Index consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market value weighted index with each stock’s weight in the Index proportionate to its market value.
S&P Midcap 400 Index: The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market, and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between the S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.
S&P Small-Cap 600 Index: The S&P SmallCap 600 Index consists of 600 domestic stocks chosen for market size, liquidity (bid-asked spread, ownership, share turnover and number of no trade days) and industry group representation. It is a market value-weighted index (stock price times the number of shares outstanding), with each stock’s weight in the index proportionate to its market value.
MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI.
MSCI World Index: The MSCI World Index is a free float-adjusted market capitalization index that is designed to measure global developed market equity performance.
MSCI EAFE® Index: The MSCI EAFE Index is designed to represent the performance of large and mid-cap securities across 21 developed markets, including countries in Europe, Australasia and the Far East, excluding the U.S. and Canada.
MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets.
The CRB (Commodity Research Bureau) Index measures the overall direction of commodity sectors. The CRB was designed to isolate and reveal the directional movement of prices in overall commodities trades.
Bloomberg Barclays U.S. Aggregate Bond Index: Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based measure of the investment grade, US dollar-denominated, fixed-rate taxable bond market.
NASDAQ Composite Index: The NASDAQ Composite Index measures the market value of all domestic and foreign common stocks, representing a wide array of more than 5,000 companies, listed on the NASDAQ Stock Market.
Russell 2000® Index: The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which represents.
U.S. Dollar Index (USDX) measures the value of the U.S. dollar relative to majority of its most significant trading partners. The index is similar to other trade-weighted indexes, which also use the exchange rates from the same major currencies.
Technical analysis is only one form of analysis. Investors should also consider the merits of Fundamental and Quantitative analysis when making investment decision. Technical analysis is based on the study of historical price movements and past trend patterns. There is no assurance that these movements or trends can or will be duplicated in the future.
Stocks offer long-term growth potential, but may fluctuate more and provide less current income than other investments. An investment in the stock market should be made with an understanding of the risks associated with common stocks, including market fluctuations.
Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility.
Investments in fixed-income securities are subject to market, interest rate, credit and other risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the bond’s price. Credit risk is the risk that the issuer will default on payments of interest and/or principal. The risk is heightened in lower rate bonds. If sold prior to maturity, fixed income securities are subject to market risk. All fixed income investments may be worth less than their original cost upon redemption or maturity.
Investing in commodities is not suitable for all investors. The commodities markets are considered speculative, carry substantial risks, and have experienced periods of extreme volatility. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. The prices of various commodities may fluctuate based on numerous factors including changes in supply and demand relationships, weather and acts of nature, agricultural conditions, international trade conditions, fiscal monetary and exchange control programs, domestic and foreign political and economic events and policies, and changes in interest rates or sectors affecting a particular industry or commodity. Products that invest in commodities may employ more complex strategies which may expose investors to additional risks, including futures roll yield risk.