Every year around this time, as the calendar turns to the new year, investors tend to have a lot of questions on their minds. What happened in the financial markets last year (i.e., in 2023)? What can we reasonably expect to see occur in the markets this year (2024)? And every four years, investors ask themselves how they should position their portfolios to take advantage of the upcoming presidential election in the 4th quarter of the year. Let’s address those questions and others with perspective and insight so we are best able to take advantage of the opportunities the financial markets present to us.
In terms of 2023, the market narrative swung wildly from the beginning of the year to the end. If you can remember back to January of 2023 the question was one of how severe the pending recession would be. Very few were questioning if there would be a recession as everyone knew the economy was going to slow down precipitously because that is what happens when the Fed raises interest rates. Well, as Mr. Market often does, he humiliated the consensus and the economy not only avoided recession but, as reported by the Bureau of Economic Analysis, real GDP grew at an unexpectedly brisk pace of 2.5% for the calendar year! Furthermore, broad equity markets also performed quite well, albeit in a narrow market, with the “Magnificent Seven” leading the way. The following graphic shows that fixed income also performed well, returning north of 5% in 2023. As you will also be able to see in the following graphic, 2023 almost looks like a mirror image of 2022:
As it stands now, with February around the corner, the market is still pricing in 5-6 rate cuts from the Fed in 2024. In our estimation, the number of rate cuts will be less than that but the message from the Fed is clear—we are finished tightening. This sentiment has been universally hailed as positive news for markets. In addition, corporate earnings have been stronger than expected and inflation appears to have been tamed with any sort of runaway inflation scenario no longer being seen as a possibility.
Despite all the positive news we heard to end 2023 and to begin 2024, there are still plenty of risks lurking on the horizon. Geopolitical risks remain high, and the upcoming uncertainty of the US election will likely cause an increase in overall volatility in 2024. Further, the balance sheets of the US consumer are beginning to gradually deteriorate as credit card debt is at an all-time high and credit card delinquencies continue to increase. Speaking of debt, the entire bond market benefitted from lower yields and more expected cuts in 2024.
One dampener from a market standpoint is that despite the S&P 500 having such a strong 2023, the S&P equal-weight index increased by about 12% less than the full index did. A narrow market is usually not considered to be a healthy market. On a positive note, though, the rally did broaden out quite a bit (to value-oriented stocks, small and mid-cap stocks and even fixed income) during the last 2 months of the year. Here is a graphic showing the relative narrowness of the 2023 large cap US equity market:
As we look forward to the remainder of 2024, it appears as though the Fed has been able to create an environment where they were able to restrict the economy enough so as not to make it overheat while also keeping unemployment low and cooling inflation. Assuming growth is still positive but economic activity does slow down too much and the Fed does cut rates in 2024, it stands to reason that both bond and stock markets are poised to have another positive year. Of course, the uncertainty of not only the US election but of many elections across the globe will likely cause some bumps in the road.
In closing, for those out there that are still curious about what to do in advance of the election or how to best time the sale of their investments in front of the next recession, I would say the following graphic does a wonderful job of putting to rest the notion that timing those nearly unknowable items is a worthwhile endeavor:
Chief Investment Officer
About Wolf Group Capital Advisors
At Wolf Group Capital Advisors, a comprehensive wealth management firm and Registered Investment Advisor (RIA) based in the Washington, D.C. metropolitan area, nothing is more important than the fiduciary responsibility we have in managing your wealth. Taking the utmost care, we focus on providing advice tailored to your specific circumstances. With more than two decades advising U.S. expatriates and non-US citizens employed by international organizations, we are qualified in investment strategies addressing global issues. Empathy and curiosity—combined with our experience in life planning and investment management—enable you to explore a wider set of possibilities that can lead to a fulfilling life you’ve worked hard to attain.
The information presented is not an offer or a solicitation to buy or sell securities. The information contained in this presentation has been compiled from third-party sources and is believed to be reliable; however, its accuracy is not guaranteed and should not be relied upon in any way whatsoever. This presentation may not be construed as investment, tax or legal advice and does not give investment recommendations. Any opinion included in this report constitutes our judgment as of the date of this report and is subject to change without notice.Additional information, including management fees and expenses, is provided on our Form ADV Part 2 available upon request or at the SEC’s Investment Adviser Public Disclosure website. Past performance is not a guarantee of future results.