We’ve had a sweet rally in the last quarter in both stocks and bonds. So with this beautiful end to 2023, what’s the outlook for 2024?
The Markets
Historically, future returns are driven by attractive valuations, and so when we’re looking for the threats and the promises we look at evaluations. The biggest threat to the markets or within the markets are the Magnificent Seven. We’ve talked about these, Apple, Microsoft, Google, Amazon, Nvidia, Meta, and Tesla. A lot of the Magnificent Seven story is highly correlated with the AI stocks and the AI story. The rest of the markets are actually fairly valued. They haven’t done a lot in the last few years. In fact, this recent rally, somewhat, has been a more normal rally and not so much a Magnificent Seven rally. And so with markets fairly valued, that means there’s all sorts of opportunities as long as we’re staying away from that concentration. Great opportunities and value, mid- and small-cap, and especially cherry-picking international opportunities.
Interest Rates
Interest rates, as we all know, are stabilizing. We’re not expecting any more increases and possibly even some drops if the economy slows down. That means it’s time for an end to the short-term bond focus and a return to a more normalized bond portfolio. One that enables us to lock in yields and benefit from subsequent drops in long-term interest rates. Interest rates have normalized. They feel high today, but historically, they’re very normal. If anything, they’re attractive. As a result of these normalized interest rates in 2023, business bankruptcies were up to 30%. This is a cleaning of the closet, a cleaning out of the zombie companies. It wouldn’t be surprising that these higher interest rates soften consumer demand a little bit. Housing’s more complex. These interest rates aren’t great for housing affordability, but there’s such a chronic shortage of inventory that even a slight drop in interest rates could break loose this market.
The Election
A lot of people are going to be talking about the election. I’m going to have the same speech I have every four years. There’s almost zero statistical correlation between what’s going on in the election and what’s going on in the stock market. The stock market is agnostic. This is important because people are, especially partisan, tend to feel especially positive or negative based on their favorite candidate, and that leads often to mistakes from an investing perspective.
There’s always, of course, a risk in forecasting. Experience teaches us that timing is a bit of a fool’s errand. We can get the valuation right, but getting the timing right is always tricky. So what do we do? We’re going to rejigger the weights of the different asset classes with consideration to the relative valuations and continue with our disciplined managed asset allocation process.
We wish you the best of investing success in 2024.
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