January 2024 opens to a market that nearly touched all-time highs in its final sessions of 2023. The promise of interest rate cuts has market participants pricing in the coveted soft landing. Technology led the way for the prior twelve months, and many pundits believe it can repeat the performance. Winners keep winning, what could possibly go wrong?
Markets Rally
December proved to be a can’t miss month, with indices rallying to close the year. The S&P 500 rose 3.81%, the Dow Jones Industrial Average 3.98%, and the Nasdaq Composite 4.94%. Rewind to January 2023, and those returns would have been acceptable for a full-year period, given the supply of recession predictions. The strong December showings brought annual total returns to 26.79%, 16.22%, and a stunning 45.73%, respectively. Markets are always forward-looking, and quick to adjust when the view changes.
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Fed Signals
The closely monitored Federal Reserve meetings concluded the year on a more dovish note, a melody that resonated delightfully with investors. While the committee is happy with rates at current levels, they have left the door open to tighter financial conditions for longer than the market expects. Economists are more closely watching the behind-the-scenes tightening caused by balance sheet reductions. The money supply has steadily decreased over the past year, leaving the economy in unchartered waters. We still have a considerable journey ahead before the wave of excess capital stemming from pandemic stimulus fully washes through the system. It may sound repetitive, but it's crucial to emphasize that interest rate fluctuations will continue to wield substantial influence over asset prices in the foreseeable future.
The Consumer
Consumers remain resilient, with record holiday season spending in the books. Most outstanding mortgages are still locked at historically low rates, adding to the “wealth effect” of existing homeowners. Those comparatively low rates make it more difficult to buy a different home, leaving existing home inventory low. Residential home building is primed to grow as new buyers seek creative financing opportunities. You could say the job market is cooling, if going from a boil to a simmer fits your definition. The U.S. economy has somewhere near 8 million jobs open at last count, leaving employees in a strong negotiating position. This shines through in wage growth, which continues to outpace inflation. This all adds up to a consumer still willing to spend.
Elections
Where does this leave us moving into 2024? We have yet to discuss politics, elections, and the debt crisis. Here is my bold prediction for the year: There will be debates. Candidates will debate each other, then pundits will debate who won the debate. This is nothing new. The Federal debt, while rising at an alarming pace, is unlikely to be addressed during an election year. As we’ve seen recently, debt ceiling fights will give way to can-kicking, and unbalanced budgets will chug along. Again, this shouldn’t surprise anyone. Markets are rarely affected by the outcomes of elections. Long-term, the economy grows, and markets rise no matter who takes control.
We do look forward to opportunities to secure real yields and buy quality assets at a discount. The volatility of election years brings chances to buy if you are patient. If you woke up on January 1st resolving to make your money work harder for you, I think you’ll have a good chance of doing that. Take some time to review your financial goals, discuss them with your trusted fiduciary, and tune out the noise.
