2024 Outlook
January 18 , 2024

2023 Review

As 2023 drew to a close, the U.S. stock and bond markets showcased remarkable resilience, overturning the cautious predictions of many financial experts. This period was characterized by significant milestones, with the Dow Jones Industrial Average hitting an all-time high and the S&P 500 nearing a record peak, delivering a robust annual rally of over 20%. This upsurge wasn't confined to equities alone; bond portfolios, which had faced a tumultuous 2022, rebounded impressively. Notably, Bloomberg's broad bond market benchmark delivered a substantial 5.5% return for the year, recovering from negative performance earlier.

The year 2023's market surge was underpinned by several key factors. First, consumer spending remained stronger than anticipated, supported by a buoyant labor market, and increasing real wages. This consumer strength was crucial in driving the market's recovery, reflecting a broader economic resilience.

Corporate profits also played a significant role. Despite challenges, many companies managed to maintain profitability, which, in turn, bolstered investor confidence. Technological advancements, especially in the realm of Artificial Intelligence (AI), further spurred market enthusiasm, with tech stocks seeing considerable gains

<sup>Looking Ahead to 2024<br/></sup>Economic Outlook and Potential Risks

Looking Ahead to 2024
Economic Outlook and Potential Risks

As we turn our attention to 2024, the economic outlook presents a mix of optimism and caution. The U.S. economy is expected to continue growing, albeit at a slower pace, and could be increasingly sensitive to various risks including potential political changes, policy shifts, and global tensions.

The possibility of economic challenges looms, particularly if the trend of "rolling recessions" observed in recent times continues. This phenomenon has been marked by certain sectors, such as housing and manufacturing, experiencing recession-like conditions, while others like services remain less affected.

The concept of rolling recessions refers to the cyclical downturns in specific sectors or industries, rather than a broad-based recession impacting the entire economy. 

These downturns have been somewhat isolated, affecting particular sectors at different times. The hope for 2024 is that these isolated recessions will evolve into "rolling recoveries," where the affected sectors bounce back, contributing to a more balanced and sustained economic growth.

The Federal Reserve's Policy Stance

A significant variable in this economic equation is the Federal Reserve's monetary policy. In 2023, under the leadership of Fed Chair Jerome Powell, indications suggested that the rate-hiking cycle had come to an end. Looking into 2024, the Fed's policy trajectory seems inclined towards rate cuts, potentially up to 75 basis points. However, these cuts might be in response to further economic downturns, particularly in the labor market, which has begun to show signs of stress.

The Federal Reserve's dual mandate — to promote stable prices and maximum sustainable employment — will likely see a shift in focus. While 2023 was predominantly about managing inflation, 2024 might see a greater emphasis on employment. This shift could have far-reaching implications for the economy and markets.

As of early 2023, the unemployment rate, which had reached a low of 3.4%, began to inch upwards. While a rising unemployment rate can be concerning, it's essential to understand its context within the broader economic landscape. Historically, recessions have led to increased unemployment, not the other way around

Market Projections for 2024

Looking ahead, the market landscape in 2024 is expected to be shaped by several factors. The economy's response to the lagged effects of the Federal Reserve's tighter monetary policy and the shift away from historically low interest rates will be crucial. Investors will closely monitor how these changes impact various economic segments, especially those already showing signs of weakness.

For equities, the focus will likely shift towards companies with strong fundamentals. Businesses boasting robust free cash flow, substantial cash reserves, high interest coverage, and consistent revenue growth will be in the spotlight. These "quality" factors are anticipated to become increasingly important as the cost of debt servicing rises, affecting corporate profitability.

The potential for lower interest rates in 2024 seems straightforward, yet the journey towards this outcome is expected to be fraught with challenges. Bond yields are projected to decrease, aligning with anticipated declines in inflation and a slowdown in economic growth. However, the market's reaction to Federal Reserve policy decisions will likely continue to induce volatility.

In 2023, the 10-year Treasury yield experienced substantial fluctuation, reflecting the market's response to shifting economic indicators and policy decisions. Bond yields, which move inversely to prices, typically rise during periods of economic strength, and fall when growth appears to be slowing. The expectation is that both short- and long-term yields have reached their peak for the current cycle and will continue to decrease, assuming inflation continues to diminish in 2024. This could provide a tailwind for bond investors, enhancing returns beyond attractive current yields

<sup>Equity Markets</sup><br/>A Look Forward

Equity Markets
A Look Forward

The equity market in 2024 is poised for potential continued growth, especially if economic conditions remain favorable and technological advancements continue to drive productivity gains. While the largest stocks have dominated recent gains, there is an expectation for a broader market performance. Active management will be key in identifying undervalued companies with strong earnings potential that may have been overlooked.

Internationally, opportunities appear promising for long-term investors. International equities are trading at attractive valuations, offering a chance for diversification and exposure to global trends. These markets provide higher dividend yields compared to U.S. equities, adding to their appeal.

Alternative Investments and Asset Allocation

Given the uncertain outlook for traditional asset classes such as equities and fixed income, alternative investments may help investors achieve desired outcomes of alpha, income, and diversification. Alternative assets can offer low correlations to public markets and diversified income streams, enhancing long-term returns. We continue to see compelling opportunities in private equity, real estate, and credit.

The Federal Reserve's policy tightening has made cash-like instruments more attractive, offering yields above 5% with minimal risk. However, historical trends suggest that remaining overly invested in cash following peak interest rates can result in missed investment opportunities. Investors are therefore advised to consider a balanced approach, keeping sufficient liquidity while also investing in long-term assets that offer better potential post-peak interest rates

Conclusion

As we move into 2024, the economic and market landscape presents a complex picture. The possibility of continued economic growth, coupled with the potential for lower interest rates, creates both challenges and opportunities. Investors will need to navigate this environment with a focus on quality investments, diversification, and an eye on long-term goals. While the path ahead may have its share of volatility, the ingredients for a profitable year in the markets appear to be in place.

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