Happy New Year! Everyone at Navigate Private Wealth wishes you a prosperous 2024. Several important economic conditions changed during 2023 that give us confidence going forward. Interest rates may have maxed out and be on the decline, which makes bonds look very attractive. Inflation declined steeply as high interest rates from 2022 slowed down economic activity in 2023 while employment stayed strong helping the consumer continue consuming.
While there are good signs for the future, there are also areas to keep an eye on. Economic stimulus from 2020’s causing over consumption as shown in the graph below should be running out over the next several months, unemployment could start rising and high interest rates may cause the consumer to decrease spending. The effects could hurt profits for companies, which could result in lower stock prices.
One could say our theme for 2023 was to prepare for the worst and hope for the best. There is no reason to change for at least the first half of 2024. If the stock market becomes volatile in the short run, it will only increase our optimism in the long run.
A Look Behind & Ahead
2023 4th Quarter Review
All’s well that ends well. The Federal Reserve did not increase the Federal Lending Rate to banks during the fourth quarter. In fact, Chairman Powell suggested decreasing rates in 2024. The stock market grew substantially in November and December based on interest rate expectations. The rise gave all of our portfolio models a nice boost to end the year.
2024 1st Quarter Preview
We are concerned the stock market is a bit over priced from fourth-quarter gains, which could lead to short-term volatility. Unemployment could increase slightly.
Bonds remain very well priced and should be stable or grow depending on how much future rates decrease. Our recommendation is to stay put for now.
U.S. Stock Market
As mentioned above, the stock market had exceptional price appreciation in the fourth quarter of 2023 (perhaps too much). We see signs that the economy is improving and money supply is getting back to reasonable levels. This is good for the long run. However, we remain cautious for the first half of 2024. If we have a sharp decline in stocks during the first half of the year, we are likely to get back to target risk levels and more diversified holdings. The S&P 500 has been hard to beat over the past few years. As the economy improves later in the year, we hope to see more breadth in company earnings. In other words, we want to see small and mid-sized companies earn higher profits too.
The worst year in the US Bond market since 1931 was 2022. The fall in bond prices was due to rapidly increasing interest rates in an effort to decrease high inflation. Since then, the Federal Reserve has stopped increasing rates and we foresee rate decreases in 2024. This means the opposite is likely to take place over the next two years. We have already seen bonds appreciate since the beginning of November. The following graph illustrates highs in different bond categories and where they are priced today. We believe this is a very good time to own bonds.
International Stock Market
We decreased international holdings over the past two years. This proved to be a good decision as economic problems spread around the globe. The US is still the largest economic force and should lead the rest of world into a new economic cycle. We have not increased international holdings yet, though we are looking at it seriously. Expect more information throughout the year.
Did you know?
It’s already time for another presidential election. Four years has gone quickly. No doubt both Republicans and Democrats will be touting their policies are better for the economy and markets. But are they? The following graph illustrates which party controls the White House, Senate and Congress during high market times. This data is very interesting, but fairly meaningless. History in these instances doesn’t tell the whole story. In fact, there is no meaningful data to predict if the market will be better under one party or the other. Rest assured that Navigate Private Wealth never makes investment decisions based on politics.