I hope you are doing well as we kick off 2024. 2023 was an eventful year in the U.S. financial markets, to say the least.
Given this, I imagine you may have some questions about what’s to come in 2024. With that, I present the Q4 2023 recap and 2024 outlook.
Strength, resilience, and logic-defying are words that come to mind for equities in 2023. March and October of 2023 had bears on the offensive, courtesy of regional bank concerns and high interest rates, respectively.
Likely to be a headline theme heading into 2024, there is a lot of cash on the sidelines (i.e., uninvested cash). How much is a lot? Around a record $6 trillion, according to some measures compiled by Fundstrat. That figure is more than the sum of all non-housing debt (~$4.8 trillion) held by all Americans.
This cash could help to provide equity market support in 2024 if it is invested into stocks this year.
There’s been some tough sledding in the bond markets as investors have endured a three-year bear market with the benchmark 10-year Treasury yield trading in a wide range between 3.253% to approximately 5.0% throughout the year. Bond buyers were likely feeling better once interest rates moved lower toward the end of 2023 based on forecasts of interest rate cuts by the Fed in 2024.
Commodity Prices: Broadly measuring commodity prices using the S&P Goldman Sachs Commodity Index, we see that the index fell in 2023, indicating lower wholesale prices across a broad range of commodities. Ideally, this trickles down to the consumer if those corporations do not mark things up too much.
Consumer Price Index (CPI): Government data shows that consumer inflation, as measured by the Consumer Price Index, peaked year-over-year in June of 2022 at 9.1% and declined steadily throughout 2023. However, it may not feel like it when you purchase goods and services. “Stuff” is still expensive, with service pricing and shelter pricing remaining stubborn. Core CPI (which excludes volatile food and energy) showed a rise of 3.9% year-over-year, according to the last release in 2024 of December data.
On the note of the presidential election, associated volatility could find its way into markets. According to U.S. News, the S&P 500 has yielded an average of a 7% return in election years dating back to 1952.
The election cycle could add more headlines to a market already massively driven by headlines, with investors weighing the economic policy of the potential presidential winners.
Federal Reserve Outlook
As major U.S. market indexes rose impressively in November and December, so did expectations for Federal Reserve (Fed) rate cuts. High hopes surrounded Fed rate cuts, but there was some disparity between the Fed’s commentary and the market’s pricing at year’s end.
At the end of 2023, market expectations were for cuts to begin in March of 2024, with a total of six to seven quarter-point rate cuts priced in, according to the CME FedWatch Tool (CME FedWatch Tool, 2023). Yet, the Fed has broadcasted a message of three cuts in 2024.
In fact, while Fed members see rate cuts as likely in 2024, the path remains highly uncertain, according to the December meeting minutes released on January 3rd.
Fed officials were optimistic about the path of inflation in the meeting minutes, but market bulls who expected a super-dovish-sounding Fed ready to cut rates quickly and rapidly were left somewhat disappointed.
Perhaps we have indeed seen a market that has gotten a bit ahead of itself on rate-cut hopes. On the day of the Fed meeting minutes release, markets were still pricing in the first rate cut of 2024 to occur in March to the tune of a 66.5% probability of a quarter-point cut at the March 20th meeting.
As always, we will keep you apprised of what we know when we know it, with a focus on how what happens in the news and in the markets impacts your investments.
However, I do encourage you as a long-term investor to keep in mind the markets of March 2020, and more recently, March and October 2023, when world events led to dips. Selling assets in a panic during Covid days, regional bank pressures, or times of rapidly rising interest rates has proven to be the wrong choice time and time again.
Remember, in its 66-year history, the S&P 500 has delivered positive annual gains roughly 70% of the time. That’s not to say that the bumps in the road don’t deliver brutal news headlines and trigger emotions — but historically, remaining level-headed and disciplined puts the odds in an investor’s favor.
Armed with that wisdom, let’s keep in mind the benefits of long-term investing as we head into a new year. And, of course, if there is anything on your mind regarding stocks, interest rates, the Fed, or your portfolio, please feel free to reach out to your advisor. We are always here as a resource for you.
Andrew Fairman, CFA, CFP®
Chief Investment Officer