Happy New Year and welcome to 2024. Looking back from where we were a year ago, 2023 gave most investors a positive surprise. In December of 2022, the Financial Times published a survey that showed 85% of economists predicted a recession in 20231. Yet 2023 came to an end without a recession and with both equity and fixed income markets up across the board.
For the year, the S&P 500 was up 26%, the Bloomberg US Aggregate was up 5.5%, and most money market funds are yielding close to 5%*. Large Cap Growth outperformed Large Cap Value as the “Magnificent Seven” (Alphabet, Amazon, Apple, Meta, Microsoft, NVIDIA, and Tesla) made up an outsized portion of YTD returns. In 2023, the 10 highest weighted stocks in the S&P 500 contributed 68% of the total outperformance and caused most active managers to underperform the index.
Interest Rates
Developed market economies are recovering from extreme inflation numbers with notable trends downward in 2023. After significant tightening, most central banks look to be attempting to pause. In the U.S., wages are trending up, job openings remain high, the Federal Reserve has ended rate increases, and consumer spending continues to grow.
In December, Fed members indicated they expect three 0.25% rate cuts by the end of 2024, but provided little information on when they may occur. Markets are currently pricing in five 0.25% cuts in 2024, which appears overly optimistic considering the Fed’s consistent message of holding rates higher until they are certain inflation is trending toward their 2% target. The inflation rate remains at 3.1%, however past tightening is still impacting the economy. The last rate hike was in July of 2023, so by the second half of 2024, most of the lagged effects of quantitative tightening should be fading. Without unexpected weakening before that time, the Fed may not have the data needed to justify a rate cut in the first half of 2024.
Jobs Market and Consumer Spending
As of December, the unemployment rate held steady at 3.7% and average hourly earnings were up 4.1% year over year. Americans are now getting an actual pay raise, even after accounting for 3.1% inflation. However, this news remains overshadowed by the fact that for over two years (April 2021 to June 2023) inflation was significantly higher than earnings. It will take a longer period of real wage gains before workers truly recover. Yet consumer spending persists as December holiday sales outpaced expectations, a sign that consumers are not tapped out and remain a bright spot for the economy (consumer spending is ≈68% of US GDP).
Although revolving credit has been rising, it’s still below pre-pandemic levels: 6.3% in November, compared to an average of 6.6% from 2012 to 20192. According to the Economic Policy Institute, 22 states, plus an additional 38 cities and counties, have increased their minimum wage requirements for 2024, locking in higher earnings for 9.9 million workers3. Oil prices have continued to decline, and the restart of student loan payments has not caused the disruption predicted. The consumer appears to have more dry powder than anticipated.
The Year to Come
Looking forward to what 2024 may have in store, the first quarter has a long list of short-term market impacts. The Fed will likely attempt to lower expectations for cutting rates, which could cause interim market volatility. The US government still needs to come to an agreement on funding by January 19. Efforts to negotiate this deal will be complicated by impending elections and high debt rates. U.S. debt servicing cost increased to 16% of tax revenue, its highest level in almost 30 years. Historically, when the debt servicing cost approaches 14%, the deficit becomes a political issue and government spending is highly scrutinized.
In 2024 national elections will take place in countries that represent more than 40% of the world’s population and 80% of its stock market capitalization. Current administrations will be particularly motivated to keep their economies out of a recession at all costs, as election results are highly correlated to economic prosperity. Political pressure on central bank easing will increase. Additional geopolitical risks include unrest in Ukraine, China, the Middle East, and Israel/Palestine. However, while debt ceiling debates, political posturing, and geopolitical events often dominate headlines, implications for investors are typically minimal.
It’s becoming difficult to argue against the current bull market as returns appear to be broadening from the largest names. From January through November of 2023, the performance of the “Magnificent Seven” accounted for over 130% of the market’s overall returns. However, from the end of October through the end of December, the equal weight S&P 500 is up 16.6%, a sign that the bull market has the potential to expand. While earnings expectations and elevated valuations may restrain 2023’s largest winners, we’re now seeing potential for the remainder of the index.
Economic resilience in the U.S. and International Developed Markets is helping boost the global outlook for 2024. The weakening U.S. dollar is providing a tailwind for the International Developed sector, and we have continued to move toward benchmark weighing in this space. We continue to prefer Large Cap Value over Large Cap Growth, as Growth valuations remain historically high. We’ve moved toward a neutral weighting in U.S. Large Cap Core, and remain underweight in Emerging Markets, as China continues to struggle with deflation and the reshoring of global supply chains.
In fixed income, we’ve continued to extend duration as rate hikes come to an end. We remain slightly below the benchmark of 6 years, as the yield curve remains inverted and short-term rates are still high. This provides a slightly more conservative approach, lower price volatility, and a slightly higher yield than the benchmark. As the timing of rate cuts becomes clearer and the curve begins to flatten, we plan to continue to move toward benchmark duration.
While the market results of 2024 and beyond are unpredictable, personalized planning, asset allocation, and diversification can help you achieve your goals. Please reach out if SIMA can help you wherever you are in the process. We offer a suite of investment solutions and expert guidance to help you navigate the market.
*Individual returns will vary based on percentage allocated to equity, fixed income, and cash
- US unemployment rate set to surpass 5.5%, economists predict (ft.com)
- Strategas Research Partners
- Twenty-two states will increase their minimum wages on January 1, raising pay for nearly 10 million workers | Economic Policy Institute (epi.org)
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Heather A. Voight, AIF® | Portfolio Manager
Previous market commentaries
2023 Third Quarter Market Commentary
2023 Second Quarter Market Commentary
2023 First Quarter Market Commentary
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