Winter 2024 Market Perspectives with Brett Carleton
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Happy New Year! Now that 2023 is in the history books, let us reflect on this time last year when we navigated a bear market in the U.S. stock market, along with the worst year for bonds since the Great Depression. We were dealing with multi-decade high inflation, the most aggressive interest rate increases from the Federal Reserve Bank (the Fed) in over 40 years, and on top of that, we had a war raging in Europe. Economists’ consensus was that the U.S. economy was heading towards a recession during the year. In addition to this bleak economic outlook, the first quarter brought about two large bank failures, with Republic Bank following suit shortly after that, causing panic amongst many investors until the FDIC stepped in and guaranteed all bank deposits of the failed banks.
With the rollout of the first publicly available Artificial Intelligence program (AI), Chat GPT was introduced to the public late in 2022, but really took off last year. This propelled the stock of any company that might be involved with AI, to absolutely skyrocket. The biggest beneficiary of this was Nvidia, a company that makes the chips needed to run these computer systems, more than tripled in price. Nvidia was not the only beneficiary of this rally, Apple, Amazon, Microsoft, Facebook, Tesla, and Google also experienced significant rallies in their stock prices; the group became known as the “Magnificent Seven” and collectively averaged over 70% return for 2023. At one point during the third quarter, the “Magnificent Seven” were responsible for 80% of the return of the S&P 500. As with the adoption of the internet, there will be many winners as this innovative technology is more universally accepted.
AI was not the only attention-grabber of Americans; Taylor Swift’s concert series set records for attendance and gross ticket sales across the country, reflecting a post-Covid trend of consumers preferring experiences like travel and leisure activities over purchasing “stuff.” This trend has been drastically underestimated by economic forecasters (I cautiously remind people that the roaring twenties followed the Spanish Flu pandemic one hundred years ago). This same group of experts is calling for a slowing of consumer spending, along with a slowing of the overall U.S. economy as we move into 2024. Even though consumers have gone through most of the additional savings they had accumulated during the Covid closures, it does not mean they will necessarily stop spending. Employment remains strong here in the U.S., with total employment finally surpassing the pre-pandemic level of employment. Americans are working and their debt-service levels are near multi-decade lows, unlike 2008 when consumers were overextended.
As we neared the end of the year, the Fed may have gotten a handle on inflation. It is still too early to say confidently, though the consensus is the Fed will begin to lower the short-term interest rates by the end of the first quarter; indicating they feel confident inflation has slowed. The reason it is so important to get a handle on inflation is that once prices go up, they do not come back down. I keep hearing the question “How can inflation be going down when things are still so expensive.” As the Government comes out with the current monthly inflation data, this is not an indicator of how much prices have increased in total, just how much prices have gone up over the past twelve months. On top of this, inflation is a regressive tax, impacting low-income families the most.
As the fourth quarter ended, we saw some positive trends; Stock markets around the world all performed well and breadth expanded widely to include asset classes like Real Estate and Small Companies. This is a trend we expect to see continue as these assets appear to be much more favorably priced.
One of the big stories for 2024 will, of course, be the Presidential election which is shaping up to be quite a news story. We know from prior elections that the equity markets can be more volatile during the primary season, then tend to calm down once the two candidates have been nominated. Election years on average have been positive and we have charts that illustrate this if you are interested. The thing we must remember is we cannot forecast the future, nor time economic events. I spent my holidays reading Jeremy Siegel’s “Stocks for the Long Run,” the sixth edition (originally published 30 years ago), where he delves into data reinforcing the buy-and-hold philosophy. I will write a short follow-up piece with a few of the principles Dr. Siegal extols.
We look forward to serving you in 2024.
Brett S Carleton, CFP, ChFC