Looking back, 2023 was a recovery year from an investment standpoint. Interest rates rose (a lot) before stabilizing and dropping meaningfully in Q4. Equity (stock) markets churned for the better part of Q1 and Q2 before starting a meaningful advance in Q3 and Q4. The S&P500 was up around 24 percent but it wasn’t linear, and it wasn’t easy. The year shook out almost exactly where we thought it would (scary but true)… here is the excerpt from Dec 2022.
Not a soft landing but not too hard either. Enough that I would expect the Fed to potentially stop raising rates by the summer and maybe start to lower them a little by year end.
From an investment standpoint, I do expect a positive equity (stock) market return in 2023. Higher positive returns than consensus. The new year could start choppy and have more downside left but drift higher by late summer. Putting a pin in it, something in the 20 percent range to the upside by year end. Hard to nail down as we don’t know where 22 will end, but you get the drift.
Not taking a victory lap but pointing out that the economic impact of the interest rate cycle was predictable. With equity (stock) markets being 18 months ahead, the beginnings of a stock recovery were not far-fetched.
Looking ahead and our thoughts (not calling em predictions) for 2024…..here goes !
We believe the recovery of the equity (stock) side is firmly in place and future gains will depend on the speed and veracity of the economic re set that is starting to evolve. As opined many times, we are in the camp of pending recession and do not totally subscribe to the soft-landing scenario. Economic slowing has been very evident in December 2023 as big-ticket items, consumer discretionary spending, travel, leisure, food, and entertainment spending are all showing the weakness that is to come. Were it not for the holiday season, our belief is that consumer spend would be down significantly. On the business side, the higher interest rates (cost of capital) have had a huge impact on decision making. To state the obvious…. When money was free, business was able to get all they wanted with no repercussion. With rates today from 12 to 16 percent, the interest cost alone makes many hiring or expansion decisions a non-starter.
In summary (and this might take a while)… we used the term “economic re set”… Our belief is that we are in process of setting a reasonable new normal that will look very much like the old normal. Not the “free money normal” of zero interest rates but the decades old normal of a 3 to 4 percent ten-year treasury with a 5 percent mortgage rate. What we would call a normal economy with 2 to 3 percent inflation and normal economic growth based on reality and not free money wizardry. You see, the Fed is also a student of history and history tells us that these scenarios are long term viable for a functional society. If this hypothesis follows true, one would expect the Fed to cut short term rates by Q2 and get them back to the 4 percent range (from today’s 5.5) by early 2025. All sets up for a positive equity return in 2024 but with the caveat that volatility will be there and in a big way. The headlines will teeter between “economic slowdown” and “sure recession”. Because markets are looking ahead and pricing 18 months out…. the news noise has already been discounted and markets are setting the level to come. Would not surprise if we have a positive 15 to 20 percent again in 2024 but with small and mid caps leading the charge. While we have been overweight equity (and captured strong returns in 2023), we do expect to revert to a normal “neutral” equity allocation in Q1. Not an indictment on the expectations but rebalancing back to neutral.
As always, don’t hesitate to reach out and chat about any questions or concerns you may have. We are always around, and we do work for you. It’s a relationship and a commitment we don’t take lightly. All our best as we enter the new year !!!
Ed, Frank, and Tammy
Edward Stiles
200 N Union St.
Kennett Square, PA 19348
cell 610-745-1931
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