The Road Ahead

By Brent McQuiston CFP® on February 8, 2024

1^st Quarter 2024 Market Update

2023 is now in the rearview mirror and the results did not disappoint.  Nearly all asset classes had wind at their sails, finishing the year with positive results.  There were still several moments of chaos and uncertainty but in the end, investors were rewarded for sticking to their investment strategy.  

The equity markets were strongly led by large technology companies which pulled the S&P 500 to a 26.29% return in 2023.  What’s even more amazing is that 22% of the 26% came from the top 10 names in the S&P 500 index.  This means the remaining 490 companies added very little to the index results.     

Bonds, after struggling for the last couple of years, experienced a sharp turnaround in the 4^th quarter. This helped the US Aggregate Bond index return 5.53% last year.  Additionally, the Fed pausing rate hikes had a positive impact on bond prices. 

2024 is now underway and the markets have shown continued strength flirting at or above all-time highs.  The work of the Federal Reserve raising interest rates, along with continued post pandemic normalization of supply chains, has brought inflation down substantially.  The Fed has taken its foot off the economic brake with no additional rate hikes since July 2023.  The Fed raised rates 11 times in this cycle bringing the Fed Funds rate from .25% to 5.25%-5.50%.  Many are now anticipating that the Fed will begin lowering rates as early as Spring 2024, which may have helped fuel the recent market performance.  Our investment committee feels strongly that the Fed will hold rates at the current level through at least the 1^st half of 2024.  The Fed has repeatedly stated they want inflation to get down to 2%.  The data has been encouraging, however the pace of inflation coming down has slowed.  We believe the Fed will not risk an inflation rebound by acting too quickly. 

While inflation has moderated, economic growth has been better than expected.  Labor markets continue to be resilient while retail sales were solid over the year-end holiday period.  Could it be the impossible has been achieved with an economic soft landing?  Maybe the Fed, after getting many things wrong early in the inflation cycle, has redeemed themselves?  Time will tell but thus far an economic collapse hasn’t happened.  A recession in 2024 is still possible, however if incurred will likely be shallow and short lived.  We believe 2024 will include a more accommodative Fed with eventual interest rate cuts.  This will likely take several quarters to play out.  Eventual rate cuts should be good for both stock and bond markets. This should also help lower mortgage rates giving some relief to home buyers.  

Being mindful of valuations is always prudent and we think it is especially important in 2024.  The Nasdaq 100 index had an eye-popping return last year of 55%.  Many popular technology stocks in the index are now trading at historically high valuations.  Perhaps future earnings growth will justify these valuations, however profit taking can help keep the risk in check.  While the Nasdaq soared to new highs, other areas of the market had much lower upside participation.  For example, many blue-chip dividend paying stocks were only up single digits last year.  Rebalancing some of the gains from growth stocks into lower valuation dividend stocks could keep portfolios balanced and on track.  Should bond yields continue to decline, higher paying dividend stocks may become more attractive.  Also, many non-U.S. companies pay nice dividends and trade at lower valuations.  Revisiting international equity allocations to ensure there is enough exposure outside the U.S. will also help diversify portfolios. 

The market’s response to the Fed pause, as well as better than expected inflation data, and decent company earnings has fueled a market rally with conviction.  Aggressive investors won big while conservative investors still did surprisingly well.  This could continue in 2024 as markets tend to do well in lower interest rate environments.  Also, Presidential election years historically have been good for stock market returns.  We are not counting on a magical positive impact from the 2024 election, but the history is noteworthy. 

In summary, 2023 was a terrific year but our work is never done.  We need to look to the Road Ahead in 2024.  We always advocate reviewing portfolios for opportunities to rebalance.  This helps keep risk in check while taking profits from yesterday’s winners to reinvest in tomorrow’s opportunities. 

Should you wish to discuss the markets and strategies in more detail, please give us a call.