2024 Market Outlook
I'm excited to kick off the new year with a 2023 market recap and, of course, look ahead into what may be coming in 2024. Additionally, I will be briefly touching on some of the strategies that may help manage risk and provide opportunities for your investments.
From a calendar perspective, 2023 was a great year. Stocks were strong, and bonds showed opportunity given what's going on with the Fed and interest rates. It was a great year from a calendar perspective, but the market as still been range-bound over the past 2 years or so. As Fed speculation moved into focus of the stock market, we saw the market continue to bounce all over the place, yet we experienced double-digit returns. As we had highlighted, quality companies with strong balance sheets, assets, and earnings history were the top performers in 2023 and played a key role in these broad market returns. And not to tip the cards too far, but that's what we expect as we look ahead to the new year.
Fast forward to January 2024, and we expect a decent year in the market from point to point, with single-digit types of returns. However, that does not mean it will be that simple throughout the year. To start the year, it is likely we will see some volatility. We also have a very polarizing election as we get closer to the fall. In addition, we have remnants of inflation and cracks in the economy, as well as the all-important Fed policy to consider throughout 2024.
Market ranges and volatility
To break this apart, markets are still range-bound from all the way back to December of 2021. We saw a strong run at the end of 2023, primarily around bets that the Fed will cut rates, quickly and very soon. Essentially, the deck is stacked on things going perfectly, and the first signs of any cracks or any signals that the Fed needs to wait longer is where we will see volatility return. We are back to a scenario where good news will be bad news in the short run as the market weighs the Fed’s path ahead with every data point. So unfortunately, the Fed will remain the focal point again in 2024.
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Upcoming elections
The second big question mark on the horizon is the 2024 election. As the election rolls around, we expect to see volatility rear its head. Likely, there will be volatility and potentially a pullback in the October to December timeline. Regardless of who wins the presidential election, we expect to see volatility, as now there is so much polarization and even a degree of hate from the opposing sides. Elections are a hot topic when it comes to the markets, and many have questions on how this may impact returns ahead. It is important to highlight that typically, they do have short-term impacts. However, as you zoom out, the election has very minimal impact on actual market returns over the following years no matter which party is elected. To be clear, we will be closely watching any tax reform in 2025 as the elected office is very likely to address tax changes before the TCJA sunsets. This tax reform will have market impacts depending on any changes proposed so this will be the biggest political event we will be watching for longer term market impacts.
The Fed’s path ahead
The third impact is the Fed. Over the past two years, the Fed has been a primary focus for market movements. The Fed has likely finished raising rates now, so the way the market is viewing the Fed meetings has shifted. It is now likely they will cut rates in 2024. This can be a good thing for markets as lower rates typically stimulate the economy. It means money moves a little faster and people might invest a little bit more. But we need to be careful of what we wish for. If the Fed reacts too quickly, this could prove to be the biggest curveball in 2024. If they cut rates too fast, inflation may return to the picture and could create a stagflation scenario with lower growth and higher inflation. We are not necessarily expecting this nor setting our strategies around this potential curveball. However, it is something we are watching closely and preparing to react if need be as we evaluate the Fed’s plans.
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Opportunities ahead in 2024
So, how will we prepare for all these potential challenges? Overall, our thoughts are not too different from 2023. We like stocks but we are looking at quality stocks from companies with strong balance sheets, a history of beating earnings expectations, and a reliable track record. We would suggest caution around "zombie" type companies and focusing on those companies that have shown a history of strength. Many stocks are experiencing expensive valuations, especially with the magnificent seven. However, if we can find strong stocks at a fair value, this provides a great opportunity in 2024.
The second area that we want to focus on is bonds. Given the higher valuations of stocks, bonds finally provide a great opportunity and a way to manage risk without giving away too much upside. Throughout 2023 we adjusted our portfolios to increase our bond exposure and duration which we expect to continue to pay off into 2024 because as rates fall, bond prices go up. In fact, in Q4 of 2023, bonds were up almost 7%!
The third area is commodities. In 2024, we see commodities as a hedge and a risk management measure. If inflation continues, commodities may still provide a good opportunity for growth. If this changes, we see inflation continue to drop and we find better opportunities, it will be important to be flexible this year and shift as needed.
Finally, there is cash. If we expect single-digit stock market returns, cash is paying 5.5% with little to no risk in these instruments. We still think cash is attractive, and most importantly, provides the opportunity to pivot if markets pull back. If we see a pullback early in the year, having cash on the sidelines allows the ability to buy some of those strong companies at better valuations.
Overall, in 2024 we do expect some volatility ahead. However, we think that we are on much better footing as we head into the year. Again, the primary areas we are watching are quality companies. Bonds will provide the opportunity to diversify and see appreciation. Commodities provide us with defense, and finally, cash offers a guaranteed yield and the ability to pivot.