U.S. economic activity was strong throughout 2023. The economy withstood the shocks associated with an aggressive Federal Reserve tightening program. As we embark on the journey through 2024, several forces may affect the markets. First, let’s recap the 2023 markets.
The S&P 500 closed the year with a total return of over 26 percent. However, the index was relatively narrow and top-heavy. Only 27 percent, or about 136, of the stocks in the index outperformed the index as a whole. That’s the lowest since 1995. Ten percent of the companies comprised over
74 percent of the weight in the index as of late November.
Most of the market gains came from what is known as the “Magnificent Seven” (Apple, Alphabet, Amazon, Microsoft, Meta Platforms, Tesla and Nvidia). These stocks alone gained an astonishing 111 percent return in 2023. That does not mean those returns will continue with these companies. In 2022, all seven of them logged double-digit losses. Regardless, these businesses are currently at relatively high valuation levels (price relative to earnings). In the chart below, the highlighted area shows the annual performance of the sectors that drove much of the market return.
During December, the concentration began to shift, and we saw more participation from a wide range of sectors, which is beneficial to support the current index levels. Positive fundamentals and innovations in key sectors will likely help expand the opportunities in 2024 to broader market participation.
In late October, the U.S. 10-year Treasury bond reached a high of over five percent yield, last seen in July 2007. This shocked the stock market as investors evaluated placing money in government bonds versus the stock market. That trend quickly reversed as the 10-year Treasury began to fall and has now settled, at least for the time being, at around four percent. The stock market saw an explosive rebound through the remainder of the year.
The Federal Reserve made headway in its fight against inflation when we saw a peak year-over-year consumer price index (CPI) of 9.1 percent in early 2022, and 2023 ended at 3.4 percent. That came with a cost, though, as lending rates had pushed as high as eight percent on 30-year mortgages. Keep in mind that just because the inflation rate is down, it does not mean costs are coming down; it simply means the rate of increase in prices has slowed. You have likely noticed this with the cost of goods and services, especially in property taxes and insurance policies.
The monetary effects of the Fed's interest rate moves are typically felt with a lag. It isn't easy to know the full extent of the rate hikes on the economy. We have already seen housing come to a screeching halt, with a massive push to build multi-family homes to compete with rising home costs. One reason the rate hikes have not hit the entire economy is that businesses tightened their belts early, saved cash, cut staff sooner and avoided borrowing at higher rates. Debt held by companies in the S&P 500 is currently 76 percent fixed-rate debt, as opposed to less than 50 percent fixed-rate debt in 2007. Businesses largely took advantage of lower rates by financing their debt while money was inexpensive prior to the interest rate increases.
We expect the gross domestic product (GDP) growth rate to begin slowing in this year's first half, with minor improvements in the latter half.
What about a recession?
It is quite possible that in the Fed's efforts to combat inflation, a recession may be avoided (soft landing). However, that depends on several variables beyond simply interest rates.
- Monetary Policy: Will the Federal Reserve leave rates elevated for too long or will they need to lift rates higher?
- Fiscal Policy: How will the government handle spending decisions and taxation? If consumer spending slows drastically (because of policy decisions), that will likely tip the United States into a recession.
- Global Economic Conditions: Trade relations, geopolitical events and global economic conditions affect our economy.
- Financial Stability: Economic risk is limited when people feel their finances are stable.
- Inflation Management: The Fed wants year-over-year inflation to be around two percent, dropping the inflation rate by one percent from where it is today. Consumer spending is one of the driving forces in this area. We’re a consumer-driven nation and like to spend money. There are increases in household debt (credit cards), indicating that the formerly high levels of cash in savings accounts are diminishing. So, spending may begin to soften.
-
Real Estate and Asset Prices: From 2020 to early 2022, we saw a massive run in the price of homes with multiple offers and bidding wars. That was possible because interest rates at the time (around three percent) made homes, even at elevated prices, affordable. That’s no longer the case. Typically, there are about 5.2 million existing home sales in the United States annually, and prices increase by about four percent per year. It’s estimated that 2023 existing home sales will likely be at their lowest since 2010. New home sales were down
10 percent in 2023 compared to 2022. Housing issues are primarily due to the rapid increases in mortgage rates. Many homeowners stay put because they have an attractive rate, or at least much better than if they were to move and finance with the new rates. Working from home also allows flexibility for people to remain where they’re currently living. -
Labor Market Dynamics: The unemployment rate was 3.7 percent as of November 2023. The 50-year average is 6.2 percent. This low percentage helps consumer spending, as discussed previously. People are more willing to spend when employed and can count on a paycheck. If unemployment rises too high, spending will likely slow. The Fed's latest Summary of Economic Projections, released in September, puts the Federal Open Market Committee’s (FOMC) estimate for the long-run equilibrium unemployment rate in the range of 3.8-4.3 percent. For reference, the United States reached an unemployment rate of
14.7 percent in April 2020 during the pandemic and 10 percent in October 2009 during the financial crisis.
As you can see, achieving a soft landing is not easy. Unforeseen shocks in any of these areas can lead to a recession. A full-blown economic storm may not develop, but storm clouds will likely dominate the horizon for the foreseeable future. Below on the left is a chart showing the length of expansions and recessions. Note that expansions, on average, have been more than three times in duration (months) versus the recessionary times.
If we enter a recession, one can argue that it’s probably one of history's most highly anticipated financial events. JP Morgan’s economic forecasting team feels strongly that the Fed needs to stop raising rates, and rate cuts must begin soon, or we may not see a soft landing. The Fed predicts it will cut rates at some point this year totaling 75 basis points (.75 percent), 100 basis points in 2025 and another 75 basis points in 2026. Those cuts will bring the Federal funds rate to around three percent and put mortgage rates in the 5.5 percent range, if all plays out in that manner.
Don't hold your breath. In the near term, we expect the Fed to leave rates unchanged for at least the first quarter and possibly the first half of the year. If we do end up landing in an official recession, the announcement will come six to eight months after it begins, which is about the halfway point and the typical time the markets start to recover. The chart below shows this point.
The 2024 election
We often hear clients’ questions and concerns every four years regarding the presidential election. How will the election affect market returns? It's natural for investors to look for a connection between who wins the White House and which way the markets will go. But regardless of who wins, nearly a century of market returns shows that stocks tend to move upward over time. Investors place their money in companies that focus on serving their customers and growing their businesses, regardless of who’s in the White House. Remember, we are a consumer nation.
As mentioned above, U.S. presidents may influence market returns, but so do many other factors. Interest rates, oil prices, technological advances, innovations, wars, fears, greed and many other factors can sway the markets. We strongly suggest focusing on the longer-term picture, not the noise of today. Be committed to the plan you and your advisor have worked through.
Keep in mind, a well-diversified portfolio, carefully spread across a range of asset classes, can act as a robust shield against the inherent uncertainties and volatilities of the market. By allocating investments across different sectors, geographies and asset types, investors can potentially enhance the resilience of portfolios, mitigating risks and optimizing the potential for long-term growth. In our ever-evolving economic environment, the wisdom of diversification continues to stand as a cornerstone strategy, providing a balanced foundation for navigating the intricacies of the investment landscape.
Contribution Limit Changes In 2024
With the turn of the new year, we want to ensure you are considering the updated contribution limits to retirement plan accounts and rules surrounding Required Minimum Distributions (RMDs). In 2024, the following rules apply:
Employer-Sponsored 401(k), 403(b), and most 457 plans: Contribution limits are now $23,000, up from $22,500 in 2023. Those age 50 and older may contribute an additional $7,500 to these plans.
Traditional IRA and Roth IRA Accounts: Contribution limits are now $7,000, up from $6,500 in 2023. Those age 50 and older may contribute an additional $1,000 to these plans.
Required Distributions
RMDs: For those born in 1951 and turning 73 this year, you will be required to begin taking distributions from any pre-tax retirement accounts you have. We will work with you to ensure these distributions are satisfied to avoid any tax penalties from the IRS. Please contact your advisor to ensure you are prepared for these plan distributions.
If you have any questions or wish to discuss your current financial situation, don't hesitate to contact our office at 719-471-1171 or visit seamountfinancial.com. We at Seamount Financial Group, Inc. wish you a blessed 2024.
Sources: Bureau of Economic Analysis; First Trust Equity Newsletter 1st Quarter 2024; Bureau of Labor Statistics; T. Rowe Price 2024 Global Market Outlook; JP Morgan Eye on the Market Outlook 2024; Wall Street Journal; JP Morgan Guide to the Markets
S&P Index is an unmanaged index of 500 common stocks generally considered representative of the U.S. stock market. The performance of an index is not illustrative of any particular investment, and the performance figures quoted are historical. It is not possible to invest directly in an index. This material may contain an assessment of the market environment at a specific point in time. It may also contain forward-looking statements regarding future events or future financial conditions. Actual events or conditions may differ materially from those expressed in this material. These statements are based on our current beliefs or expectations and are subject to uncertainties and changes in circumstances, many of which are beyond our control. The readers should not rely on this information as research or investment advice, nor should it be construed as a recommendation to purchase or sell a security. Past performance is no guarantee of future results. Investments will fluctuate and, when redeemed, may be worth more or less than when originally invested.