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2023 Review and Looking Ahead at 2024

January 08, 2024

The past couple of years have presented considerable challenges for the financial markets. Wide swings in both the equity and bond markets, coupled with Federal Reserve policies and historically high inflation, created an overall unpredictable environment in a world recovering from the COVID-19 pandemic.

Although inflation reached approximately 9% in mid-2022, the Federal Reserve's implementation of several interest rate cuts proved effective in reducing that figure to about 3.1% as of last November. Despite signs of a potential mild recession, including the still inverted yield curve, both 2022 and 2023 passed unscathed without one. While traditional indicators continue to suggest a mild recession, numerous mainstream economists now align with the Federal Reserve's narrative of a soft landing.

The stock market performance was notably dominated by the 'Magnificent 7' stocks: Amazon, Apple, Google, Meta, Microsoft, Nvidia, and Tesla. After experiencing a 45% net loss in 2022, these stocks rebounded in 2023, concluding the two-year period with a 14% gain. In contrast, the S&P 500 index returned a mere 0.5% over the same period.

The U.S. consumer remains the bedrock of the country's GDP growth, with a robust labor market sustaining lower and stable unemployment rates. U.S. companies exhibit strong balance sheets, with the current S&P 500 trading at 22 times current earnings and 19.5 times expected 2024 earnings. Current stock prices reflect an optimistic outlook for earnings gains and dividend increases.

The last months of 2023 witnessed an apparent Federal Reserve "pivot" away from monetary tightening, providing the stock market with a much-needed respite. The Federal Reserve is hinting at potential rate cuts in 2024, particularly if a recession materializes. While six rumored cuts in 2024 may be overly optimistic, I believe that three cuts of 25 basis points each are more likely.

Globally, geopolitical risks persist, with Russia, Taiwan/Beijing, and the Middle East crisis posing vulnerabilities that may impact shipping costs, supply disruptions, and oil prices. While geopolitical issues are ever-present, the current situation appears to entail higher risks than usual.

By the summer of 2024, job openings are anticipated to return to pre-pandemic levels. GDP growth is expected to hover around 2%, with no imminent signs of a recession, and unemployment is projected to remain below 4%. Inflation may stabilize at or around 2% by spring, barring any sudden spikes in oil prices.

The upcoming election in the current year is likely to contribute to apprehension and uncertainty in the stock market. As investors, it is crucial to set aside political considerations. Historical data indicates that regardless of the political party in power, stock markets generally end the year positively during election years. Stay committed to the fundamentals of a sound investment strategy, keeping your financial goals in mind.

Despite the volatility, sensational headlines, and unprecedented changes in monetary policy, the fundamentals have not significantly changed. A commitment to balance sheet quality and a focus on earnings are essential for staying invested in 2024. We continue to diligently monitor and evaluate the markets to ensure that your portfolios are appropriately positioned.