January 2024 -A More Supportive Economic Environment

First, we would like to wish you and your family a happy and healthy New Year! We hope you had a great holiday season and enjoyable New Years.

As we close out the first week of 2024, let’s pause for a moment to reflect and appreciate the market returns we experienced in 2023, with the Dow, S&P 500 and NASDAQ indices posting full year total returns of 13.7%, 26.29% and 43.42%.

In our September and November (2023) notes, I discussed seasonal weakness and seasonal strength respectively and it couldn’t have played out more accurately with the months of November and December making up more than 60% of the year’s total return performance.

After an ugly 2022 with negative equity and bond returns, enduring two years of aggressive Federal Reserve interest rate hikes, the current hiking campaign officially came to an end on December 13th with inflation now in check. There wasn’t much more we could have asked for from financial markets at the close of last year with equity indices up over 20%, risk free rates of return on short term Treasuries at 5%, bond markets stabilized and an upcoming year that likely has 1.5% in Federal Reserve interest rate cuts coming as early as June (possibly March).

2023 was especially gratifying for us from a portfolio positioning lens (given our slight overweight to high quality tech and home builders) given the vast pessimism and continuous calls for recession from economists and analysts alike at the outset of the year. Remember, as I’ve mentioned before, we are long term investors -not traders and 2023 offered up some important lessons all of us should keep in mind looking forward:

  • Don’t always follow the herd. They’re right at times, but wrong more often than you think. As recently as May 2023, Wall Street strategists forecast 4,017 for the S&P 500 at year end—about 19% too low. Stocks rise about three times as often as they fall, so be wary of bearish herds.
  • Consider cycles and trends. Stocks rarely fall two years in a row. Year three of the four-year presidential cycle (e.g., 2023) has been the best over time. Bear markets tend to recover losses in under a year in the absence of recession (the last bear ended in October 2022). Historical cycle averages point to mid-to-high single-digit gains for stocks in 2024.
  • Don’t bet against the U.S. consumer. Every economic cycle is different, but the post-pandemic recovery distorted the economy such that traditional economic indicators misled many economists. One takeaway here is excess stimulus matters—for example, low interest rates, stimulus checks, student loan forgiveness, and even infrastructure spending can be too much of a good thing. Another takeaway is that consumers with jobs will continue to spend and the unemployment rate remains near 50-year lows defying economists expectations.
  • Focus on the long term. This unusual economic cycle made it extremely difficult to predict where stocks were going, reminding us that “time in the market” is a better mantra than “timing the market.” Waiting it out through the down periods, even though wars, a banking crisis, and widespread calls for recession, is the best approach for nearly all investors.

Turning our attention to 2024, we believe this year should be another positive year for equity market gains although we don’t see returns being as robust as last year. We will have a more supportive economic backdrop with inflation continuing to ease and a lower, more stable interest rate environment should help support current equity valuations.

In 2023, Corporations (particularly in the tech sector), anticipating a recession got fit by trimming costs and cutting corporate bloat. This should be reflected in upcoming earnings – with fourth quarter 2023 earnings kicking off next Friday January 12th.

Our end of year 2024 target on the S&P 500 Index is a conservative one at 4,900 -which is roughly 5.0% higher than where the index stands today. We arrive at that number by taking the 2025 S&P 500 EPS estimate of $250 and applying a 19.5 times multiple or P/E which is in line with the 5-year average. This is conservative, we acknowledge, but we also have the upcoming presidential election in November which we know will create additional volatility and a fair bit of policy uncertainty -which could be a positive or a negative. We will touch more on markets and presidential elections in our upcoming notes.

One thing we know for certain is to expect the unexpected in markets and stand ready to make the necessary adjustments to portfolios as the 2024 macro environment unfolds.

As always, we wish you and your family a great Friday evening, and a wonderful weekend!

 

Please reach out to us with any questions or comments you may have regarding your specific situation.

 

Jaran C. Day, Chief Investment Officer

 

Griffin Dalrymple, CFP®, Chief Strategy Officer

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