As we embark on a new year, the financial landscape presents a complex tapestry of opportunities and challenges. It is our belief that 2024 is poised to be a pivotal one for the stock and bond markets, shaped by a confluence of economic, political, and technological factors.
The global economy continues to recover from the effects of the COVID-19 pandemic, with varying degrees of success across different regions. Central banks worldwide continue to grapple with the dual mandate of controlling inflation and supporting economic growth. Conflicts in Europe and the Middle East continue on with no clear route to resolution. These macroeconomic dynamics will undoubtedly influence the performance of the stock and bond markets in 2024.
In our view, 2024 present both challenges and opportunities for investors, requiring a balanced approach, a long-term perspective, and the patience to not be scared into short-term decision making due to short-term market fluctuations.
2023 in Review
In 2023, the US stock market demonstrated a robust performance, defying many expectations. The S&P 500 index surged by approximately 24%, marking a significant recovery from the previous year’s downturn. The Information Technology sector was a standout, with a return of 56.4%, followed by Communication Services and Consumer Discretionary sectors, which posted returns of 54.4% and 40.3% respectively. The NASDAQ index also had a strong year, soaring by 43%, driven by gains in big technology companies.
The divergence between growth and value investment styles was evident in 2023. Growth stocks outperformed value stocks as the Russell 1000 Growth Index gained almost 43%, significantly outperforming the Russell 1000 Value Index’s 9% return.
Chart #1: www.stockcharts.com Data 01/01/23 – 12/31/23 as of 01/03/24. An index is not managed and not available for direct investment. Past performance is not a guarantee of future results.
The bond market, while volatile, ended the year positive. The Aggregate Bond Index finished 2023 with a gain of approximately 5.5%, while the yield on 10-year US Treasury bonds fluctuated between 3.25% and 5.00%, ending the year yielding 3.86%. This performance was influenced by the Federal Reserve’s shift in policy from interest rate increases to the possibility of cuts for 2024. In the commodities market, the CRB Index dropped a bit more than 4%.
Chart #2: www.stockcharts.com Data 01/01/23 – 12/31/23 as of 01/03/24. An index is not managed and not available for direct investment. Past performance is not a guarantee of future results.
Overall, 2023 was a year of strong performance for US equities, a notable divergence between growth and value styles, a rebound in the bond market, and a slide in the commodities index.
3 Themes for 2024
It has become our tradition to forego the game of attempting to put price targets on the stock market indexes and guessing at what bond yields will be at the end of the year. In our mind this is not only a fool’s game, but not very useful. A lot of expected and unexpected things happen over the course of 12 months that can change the direction of markets.
What we have found useful is to think big picture about how the world is working. The result is a number of themes we believe are useful guides to understanding what will drive the markets over the short, intermediate and long-term. For 2023 we had 4 themes that we were focused on; this year we have three.
Theme #1: The US Economy is better than it is getting credit for
Despite many analysts predicting a recession at the outset of the year, the US economy in 2023 was characterized by robust growth driven by strong consumer spending backed by robust and steady job growth, growing real wages, and historic gains for women and Black workers. The labor market remained strong, creating more than 200,000 jobs in the last month of the year and nearly 2.7 million jobs in all of 2023. The unemployment rate stayed below 4% for 22 straight months, a run not seen in more than 50 years. Concerns that the Federal Reserve’s ongoing fight against inflation through interest rate hikes might cool the labor market and put a chill on consumer spending did not come to fruition.
In our view, the primary pillar of this resilience has been the “King Consumer.” Despite challenges such as high inflation rates that have dented consumer confidence and considerably stricter lending norms, the consumer has displayed exceptional resilience. This resilience can be attributed to various factors. It could be the delayed impact of fiscal stimulus bolstering savings that are yet to be exhausted. It could be the high levels of household net worth underpinning spending. It’s certainly partly due to a robust labor market and positive real wage growth. Regardless of the reasons, the result is the same – resilience.
For 2024, Wells Fargo Investment Institute expects GDP growth of just 0.7%. We respectfully disagree with this prediction. We see four reasons:
Inflation Cool-Down: Inflation, which hit four-decade highs in June 2022, has cooled down significantly. We expect this trend to continue into 2024, providing a more stable economic environment.
Continued Strong Labor Market: The US labor market has remained stable and robust, with low unemployment rates. We believe there is nothing in the data to make us believe this trend cannot continue.
Continued Strength of the Consumer: According to research by Stanford professor of economics, Neale Mahoney, consumer sentiment has been skewed negative as the result of both prior year’s inflation and political partisanship. “While both Democrats and Republicans rate the economy more strongly when their party controls the White House, Republicans cheer louder and boo harder, in effect, drowning out Democratic voices and artificially depressing consumer sentiment.” Based on this observation we believe that the consumer is and will continue to be stronger than the numbers would indicate.
US Factory construction is booming: According to Axios, manufacturing-related construction has increased 3-fold over the average rate in the 2010s. The spending surge can be attributed to two pieces of Federal legislation – the CHIPs Act and the Infrastructure Act – passed in the 117th session of the US Congress.
Potential Interest Rate Cuts: The Federal Reserve has signaled the possibility of decreasing interest rates in 2024. Lower interest rates could stimulate investment and spending, further boosting the economy.
Theme #2: It’s (almost) all about The Fed
The Federal Reserve Bank’s (The Fed) monetary policy has been a key driver of the US stock market in the past, and we believe its decisions in 2024 will have significant implications. The Federal Reserve has signaled potential interest rate cuts in 2024. Historically, the end of a rate hike cycle has boded well for the stock market. The major indices tend to increase during the 12 months following the end of a rate hike cycle. Wall Street analysts expect revenue and earnings growth to accelerate in 2024, pushing the markets higher.
We should take note, however, that rate cuts are not a guarantee, and not the only factor to consider. One of the biggest macro risks for 2024 is the continued reduction of the Fed’s balance sheet or quantitative tightening (QT). So far, the Fed has reduced its balance sheet by nearly $1.3 trillion from its $9 trillion peak in 2022. We believe there is a risk this could potentially lead to a liquidity shock in the market.
Despite these potential risks, the stock market tends to rise following the end of a rate hike cycle. The Federal Reserve adjusts the federal funds target rate based on its monetary policy goals at any given time. In March 2022, officials began raising the benchmark rate to cool fierce inflation brought on by stimulus payments and supply chain disruptions during the pandemic. The benchmark rate has since increased at its fastest pace in four decades, meaning credit conditions have tightened incredibly quickly. However, the economy has thus far remained remarkably resilient.
While the Federal Reserve’s policies will undoubtedly have a significant impact on the US stock market in 2024, the exact nature of this impact will depend on a variety of factors, including the pace and extent of interest rate cuts, the speed of QT, and the overall health of the US and global economies. As always, we will monitor these developments closely and adjust strategies accordingly.
Theme #3: Positive but more volatile stock market
In 2024 we line up with many who expect the US stock market to be characterized by increased volatility, but also to conclude the year with a positive return. Wells Fargo Investment Institute market strategists, for example, expect flat S&P 500 earnings but the index to gain into year-end as investors anticipate an earnings recovery in 2025. There are a number of factors that have led us to our conclusion.
First is that 2024 is the 4th year of the Presidential election cycle. According to the Stock Trader’s Almanac, the fourth year of a presidential term, which is an election year, has historically been the second-strongest year for the stock market. While there is no guarantee of positive gains for the stock market indexes, we believe the historical pattern suggests that the stock market rally could continue in 2024.
Which leads us to our expectation of stock market volatility. As we enter 2024 volatility, as measured by the CBOE Volatility Index (VIX), has dropped to its lowest level since January 2020 following the year-end market rally. The VIX is often seen as a way to gauge market sentiment, and in particular, the degree of fear among market participants. In most cases, a high VIX reflects increased investor fear (often accompanied by falling markets) and a low VIX suggests complacency.
What we see here at the start of 2024 is a complacent market that faces a number known and unknown risks. We have mentioned Fed policy in theme #2 as a possible risk, but what about the conflicts in the Middle East and Europe? What is the stock market reaction if Congress cannot agree on spending in the upcoming budget negotiations on the 2024 budget that hasn’t yet been passed, or the negotiations for the 2025 budget year that begins on October 1, 2024?
Putting It All Together
Our 2024 stock market outlook is marked by three key themes: the resilience of the US economy, the importance of interest rate policy from The Fed, and the potential volatility in the stock market. We believe that this combination of themes will lead to opportunities for investors in both the stock and bond markets.
The US economy has demonstrated remarkable resilience in the face of numerous challenges, and we expect this trend to continue into 2024. Despite concerns about inflation and interest rate hikes, the economy has remained robust, supported by strong consumer spending and a stable labor market. This resilience is a testament to the underlying strength of the US economy and its capacity to adapt and grow even in uncertain times.
In regards to stock market volatility, we do not view higher levels of it as a bearish signal for the market. The historical performance during the fourth year of the presidential cycle suggests that the market could still end the year with a positive return. And as we stated earlier, we fully anticipate to end the year with a positive return on the major stock market indexes.
Finally, we believe that 2024 is a year of opportunities for investors. For those who are young and in the accumulation phase we see no reason to change course – continue to invest in your retirement accounts, your 529 College Savings Plans, and your investment accounts. For those close to or in retirement, we see 2024 as the opportunity to adjust your asset allocation to align with your spending needs. For those who had been scared out of the markets in 2022 – in part or in whole – as well as those who have been investing in money market accounts, we see opportunities to get those monies reinvested back into long-term holding in the stock and bond markets.
As always, 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. You are appreciated. 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.
Sources:
1. The 2023 U.S. economy, in a dozen charts (msn.com)
2. Ten Charts That Explain the U.S. Economy in 2023 | CEA | The White House
4. 7 economic trends to watch in 2024 | Stanford Institute for Economic Policy Research (SIEP
5. Factory construction spending booms under Biden (axios.com)
8. Presidential Election Cycle Theory: Meaning, Overview, Examples (investopedia.com)
9. The CBOE Volatility Index (VIX) is a real-time market index that represents the market’s expectations for volatility over the coming 30 days. It is derived from the prices of S&P 500 index options with near-term expiration dates, generating a 30-day forward projection of volatility
10. CBOE Volatility Index (VIX): What Does It Measure in Investing? (investopedia.com)
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.
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 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.
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
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.
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Robert I. Cahill, Partner Rob.Cahill@wfafinet.
Jonathan D. Soden, Managing Partner Jon.Soden@wfafinet.com
Robert Sweeney, Financial Advisor Bob.Sweeney@wfafinet.com
Jay Knight, Senior Account Administrator Jay.Knight@wfafinet.com