News & Insights

Fairport Perspectives / January 2024

By John Silvis

January 8, 2024

In what has now become an annual tradition, the Investment Team collectively came up with our top thoughts and themes for the new year. While these are some of our best thoughts, they are not predictions. As we welcome the opportunity to move forward into a new year, 2024 should build off last year’s momentum and be another positive, but volatile, year for both the equity and fixed income markets.

Economy will slow as we head into the new year but will avoid falling into a recession. After avoiding the vast majority of economists’ call for a recession in 2023, we believe the Fed will successfully orchestrate a soft landing with GDP growth remaining in positive territory for the year. It is possible we could see some weakness as the effects of higher rates squeeze consumers, but not enough to rise to recessionary levels. JP Morgan recently raised their economic growth forecast for 2024 to 1.6% with a call for no recession[1].

Interest rates on the 10-year Treasury bond will fluctuate throughout the year but will not rise above last year’s high of over 5%. Yields on the benchmark 10-year Treasury bond will continue to search for equilibrium, but we believe the highs are likely in for the next few quarters. Regardless of when the Federal Reserve cuts rates, interest rates further out on the yield curve will gyrate with the release of economic data but will not retest the highs.

Fed will shift focus to the economy and cut rates multiple times in 2024. At last December’s meeting of the Federal Open Market Committee (FOMC) led by Chair Powell, the Fed was clearly dovish signaling they would likely cut rates at least three times in the new year. The Fed looks to pivot to supporting economic growth and maintaining employment levels. As of now, the capital markets have taken the Fed at its word and expect rate cuts to start as early as March.

Small caps will extend last year’s late bounce and will outperform large caps. For the first time since the rebound in 2020, small caps will have a positive year and outperform the S&P 500 Index on a relative basis. Small caps, represented by the Russell 2000 Index, were hampered last year by financials (mostly community banks) which made up over 17% of the index. We think attractive valuations, lower financing costs and a rebound in Financials will fuel the outperformance.

The current equity bull market will expand to new highs in 2024. The breadth of the equity markets continued to expand as we moved into the end of 2023. We expect that to pay dividends throughout the year. According to Ned Davis Research, when the S&P 500 Index has over 90% of its participants trading above their 50-day moving average, the equity markets are higher one year later 100% of the time (20 out of 20) with a median return of 16.5%. We would expect to see stocks outside of the “Magnificent 7” help drive the rally.[2]

Inflation will fall around the globe with domestic inflation settling below 3%. It has become apparent that inflation peaked globally last year and data has seen a steady decline over the last few months with U.S. Consumer Price Index (CPI) falling to an annualized 3.2% in the month of November. Further declines should be driven by more balanced labor markets, a fall in commodity prices and a decline in rents. We expect the unemployment rate will drift higher towards 4% throughout the year.

Volatility will be more present as we head into an election year with a divided electorate, global unrest and more gridlock. According to Strategas Research, nearly 80% of the world’s market capitalization will face a national election of some sort this year putting markets on edge to any changes in global leadership.[3] In a year where the U.S. president is running for reelection, the total return of the S&P 500 has been positive every year since 1944. Global conflicts in the Ukraine and the Middle East are likely to drag on, and the fight over funding will intensify. And do not forget they haven’t passed a budget…

The rise of Artificial Intelligence is still in the early stages. The love affair between the capital markets and the use of artificial intelligence is still in the early stages. Equities tied to the technology, many driven by “the Mag 7”, should continue to outperform the overall markets but will see increased choppiness as some early investors take profits and the call for regulation intensifies. The long-term story remains intact and should start to see early benefits to earnings and margins in 2024.

Cyclical sectors will retain market leadership late into the year. Cyclical sectors (Technology, Consumer Discretionary and Industrials) maintained market leadership for most of last year as defensive sectors (Utilities, Consumer Staples and Health Care) struggled with higher rates and bloated valuations. We see the “trend as your friend” and stick with leadership. According to Renaissance Macro Research, at this point in the market cycle, cyclical sectors have historically been outperformers.[4]

Both stocks and bonds outperform cash as short-term yields fall from their highs. With interest rates on money markets and T-bills topping out above 5%, savers have engaged in cash-sorting (moving money from the bank into higher-yielding products). As the Fed moves to lower rates it is likely savings rates will fall. Both stocks and bonds are likely to benefit from lower rates among other things and see inflows from investors.

Emerging markets, except for China, will again outpace the developed markets. The Chinese economy has not fully recovered from the ramifications of its strict Covid policies and the slow pace of its post pandemic re-opening. While valuations are “cheap” for Chinese equities, we think there are better avenues within the emerging markets. Both India and Brazil had better returns last year and are poised to benefit from better ties with the West.

We remain focused on the long term and the opportunities ahead as we transition away from an inflationary period and towards a more accommodative monetary policy. They say the market likes to climb a “wall of worry” and this year should be no different. To continue this discussion, be sure to join me on January 19th for this year’s first Investment Townhall.

The beginning of the year is always a good time to review your long-term goals and asset allocation with your advisor. Please feel free to contact us with any questions or concerns. Happy New Year!