Looking Forward to 2024

By Christian Gannon on January 4, 2024

Each year investment professionals do their best to forecast what will happen in the coming year. It’s a woeful exercise that is sure to be incorrect because of the high level of uncertainty and infinite number of potential variables. Last year, we provided the bull and bear case headed in to 2023. We were coming off a very challenging period in 2022 and the light on the horizon was dim. We entered 2023 optimistically and the markets have been even more resilient than we expected.

Before we look at 2024, lets look at our expectations coming into 2023 and how we did.

What we got right

• Inflation subsiding closer toward Fed target of 2%
• Fed signaled a pause in the second half of the year
• A bumpy first half of the year followed by a turn near the end of the year for the broad markets

What we got wrong

• Uptick in unemployment – unemployment rate has been steady all year as labor market has shown impressive resilience
• Slower consumer spending – consumer spending has outpaced most expectations with little sign of slowing thus far

Now to our best guess for 2024

• We anticipate continued growth in the economy as interest rate conditions ease
• Pockets of dislocation in sectors like commercial real estate should create investment opportunity for those with long time horizons and capital to deploy
• The election will create noise as we move through the middle part of the year and markets will rally into year end after questions have been answered

The economy appears to be moving into a more expansionary phase of the business cycle. Rate cuts should provide additional stimulus to companies and consumers. We anticipate that inflation will continue to move down toward the Fed’s 2% inflation target and that the market will respond accordingly as it monitors the inflation trajectory. We do expect the Fed to be patient with its rate cuts. We have contended since last year that mid-2024 was likely the earliest we’d see a rate cut. Unless the economy went into an unlikely recession or inflation takes a steeper downward trajectory, we expect the Fed to exercise patience. If we do in fact enter a more expansionary phase, we believe that there is great opportunity for underappreciated value and smaller cap stocks to perform well. Growth companies that are heavily reliant on outside financing may face some headwinds as capital rates will continue to be higher than they have been for the last decade.

The chart below shows the returns since the beginning of 2022 for dividend paying stocks, growth stocks, investment grade bonds and 10+ year US Treasuries. A couple of things are worth noting. First, despite the very strong performance from this year, growth stocks and dividend paying stocks are basically even for the past two years. Both strategies make sense to accomplish different goals, but it highlights the power of “winning by not losing” as well. A second point is that Treasuries and investment grade fixed income have still not recovered from the 2022 market drawdown. This can be a boon for bond price returns over the coming years as rates come down and those bonds pull to par value as they near maturity. 

      ^{Source: Morningstar Direct as of 12/26/2023}

A second theme for 2024 could be stress in some areas of the market. Pockets of dislocation are likely in sectors such as urban commercial real estate or niche multifamily sectors where inexperienced investors made poor financing decisions in 2019/20. For investors with capital waiting in the wings, this could provide interesting long-term opportunities. For financial institutions that held much of that credit, it could be a headwind. Certainly there are segments to approach with caution but it’s important to not get caught up in the negative sentiment.

We’d be remiss to not mention the election. Much airspace will be occupied with the potential outcomes should one party be elected over the other. There have been 23 elections since 1928 and in 19 of those years, the performance of the S&P 500 has been positive, regardless of what party was elected. The table below provides some context and observations around what we know about elections. 

                                            ^{Source: First Trust as of 12/26/2023}

Additionally, a study by US Bank found that economic conditions provided a better explanation of market returns than did the actual election outcome. The table below shows that rising growth and falling inflation has been a significant driver of positive performance in past election years. Certainly there are events that could derail this, but if we are right about growth and inflation expectations, then environmental conditions should be more conducive to a positive market environment.

                        ^{Source: US Bank Asset Management Group as of 12/26/2023}

We express these views with the utmost humility, knowing that we will surely see a curveball that we didn’t expect. We do believe there is much to be optimistic about. While there are always lingering questions, markets have been resilient, and find ways to adjust to new economic regimes. 

Thank you for your trust and partnership. We are grateful for the opportunity to serve each of you. 

Christian Gannon – Director of Investments | cgannon@twickenhamadvisors.com

Disclaimer

Hightower Advisors, LLC is an SEC registered investment adviser. Securities are offered through Hightower Securities, LLC member FINRA and SIPC. Hightower Advisors, LLC or any of its affiliates do not provide tax or legal advice. This material is not intended or written to provide and should not be relied upon or used as a substitute for tax or legal advice. Information contained herein does not consider an individual’s or entity’s specific circumstances or applicable governing law, which may vary from jurisdiction to jurisdiction and be subject to change. Clients are urged to consult their tax or legal advisor for related questions.