As we begin the new year, I want to share my reflections on the financial markets in 2023 and the outlook for the markets in 2024. If you have not done so already, I recommend taking time from the start of the new year to review your budget, past year expenses and investment allocations. Optimally, you would want to do this on a regular basis throughout the year. Targeting your annual budget and spending to income without sufficient financial reserves could weaken your future financial plans due to life events outside of your control.
In addition to reviewing your budget and spending, review your investments. You should be receiving year-end statements with 2023 market performance and investment holdings, and it is a good time to determine if your current investments are aligned with your short-term and long-term financial goals. Are your portfolio allocations in line with your risk tolerance? How do fund expenses compare to peers? Do you have too much of a good or a bad thing? Occasionally, funds will change their investment mandates.
Why it is important to review your investments this year.
I feel there was material change to the macroeconomic environment when the Federal Reserve pivoted from a hiking interest rate environment in 2023 to cutting interest rates in 2024. Due to the Fed’s shift, review your portfolio asset allocation and ask yourself how a plus or minus 20% change in the value of your portfolio would impact on your financial plan.
Not too long ago, interest rates were at 0% and investors were well compensated for holding equities. Now that interest rates are closer to 5.3%, the decision to buy equities is not as attractive as it was a few years ago.
2023 Recap
The financial market, stock, and bonds finished the year strong on positive statements from Fed Chairman Jerome Powell. He indicated the Fed was planning to cut interest rates in 2024 by 0.75%. This announcement sent stock prices higher and bond yields lower.
2023 grinded higher despite concerns of higher interest rates, inflation, and a recession. The US consumer, despite the many headwinds, continued to spend money and avoided a recession. The Fed remained vigilant and raised interest rates to fight inflation for most of the year.
The Technology Sector led the equity indexes higher on back of the emergence of Artificial Intelligence. Facebook, Apple, Amazon, Google/Alphabet, Microsoft, Nvidia and Tesla, aka the Magnificent Seven, were the main contributors to market gains in 2023.
2024 Outlook
The market indexes moved higher into the year-end on the back of dovish comments from Jerome Powell. The bond markets rallied (lower yields) and priced in six rate cuts for 2024 vs. market expectations for three rate cuts.
Despite the changes in market expectations for rate cuts in 2024, we remain cautious in our outlook for 2024 due to geopolitical uncertainty, US presidential elections, and extended stock index valuations. The US government budget deficit and record high debt, exceeding $34 trillion, is also worth monitoring. While the Fed can manage short term interest rates, they have little control over long-term interest rates. The US 10-year bond is the benchmark for mortgage rates and bank lending rates.
There are a lot of positives for the US economy as we begin the new year. Interest rates near 30-year highs are providing additional spending power for consumers holding cash balances held at banks. The US consumer continues to be resilient and is spending to support the economy. Corporate balance sheets are well positioned to weather an economic slowdown. Valuations for non-Magnificent Seven stocks both domestically and internationally are attractive and we believe will outperform the Magnificent Seven in 2024.