Happy New Year everyone! As we continue to do on an occasional basis for our Napier Financial newsletter readers, we’re sharing some brief high-level perspectives from our investment team’s vantage point on what’s recently taken place in markets and our investment outlook ahead.
Looking back at 2023, we think it’s fair to assume that markets lived up to their reputation as a leading indicator on the direction of the economy. This is again why we continue to believe that remaining invested even during turbulent times makes practical sense for our clients. The past year contained no shortage of potential land mines: forecasted recessions (that never materialized); a banking crisis; war in the Middle East; escalating tensions with China; looming government shutdowns; stubborn inflation; a hawkish Federal Reserve; and a 10 year Treasury bond yield that briefly touched 5% and threatened to go much higher, something that would have tightened economic credit conditions even further. That’s just to name a few. Yet despite these potential headwinds, markets not only survived, but thrived, with the S&P 500 returning north of 20% by year end.
One might ask, how is this possible for markets to post such an outsized return and ignore all this bad news? Per usual, the answer is it’s complicated and does not reflect just one particular factor. The most obvious reason is the high probability the Federal Reserve has orchestrated a “soft landing”. This means that The Fed has slowed the economy just enough to rein in inflation with their aggressive interest rate hike program, but without tipping the US into a recession. A true feat indeed! At their last December meeting the Fed indicated they were probably done with the rate hike program, and they penciled in the possibility of three rate cuts in 2024. This set up a late year feeding frenzy. There’s also normalization taking place from the pandemic. Broken supply chains are mending, the labor market is becoming more balanced in terms of supply and demand, product shortages are receding. Also, the Fed is no longer stepping in to rescue bond and stock markets in conjunction with economic event shocks. Lastly, the consumer, a beneficiary of the strong labor market and backbone of our economy, has continued to spend.
The multi-trillion-dollar question is will 2024 be a repeat of last year’s impressive performance? As said in my last article, trying to determine how the market will behave during any relatively short time span is extremely difficult. We believe the economic puzzle continues to look promising and should provide long term tail winds for markets, which historically benefit from slow economic growth, falling interest rates and inflation, something that is currently taking place. It’s important to note the opposite was true in 2022 and was a major contributor to the bear market we experienced. Also, with all its potential pitfalls, AI holds great future promise and could reshape productivity and economic growth going forward.
However, all that being said, given the significant run-up in prices, particularly late in the 4th quarter, we do see the possibility rising for near-term bumpiness ahead as markets attempt to digest recent gains. This bumpiness could be exacerbated if the Fed moves slower cutting rates than markets expect, or if they miscalculate the economic environment and tip us into a recession (which, if took place, we would expect a shallow one). Another factor that could increase volatility later in the year is a contentious election. We remind our readers that market drawdowns can and will happen, typically with some regularity, and are a normal part of investing. Despite the significant annual market return, some may forget this happened as well in 2023 during the July through October period.
I’d prefer not to end on negative note, but it needs to be conveyed that we live in a world of heightened geopolitics. Events in the Middle East, Far East and Eastern Europe remain fluid and could present challenges to the global economy if these conflicts were to spread. Our client’s portfolios are constructed to be widely diversified across geographies, asset classes and industry sectors in an effort to reduce the impact of volatility.
If you have any additional questions or wish to discuss our investment outlook further, please contact Michele Schulz to schedule a meeting with a member of Napier Financial Team. (mschulz@napierfinancial.com; (781) 884-2316).
Tom Fletcher and the Investment Committee
Financial planning and investment advice offered through U.S. Financial Advisors, a registered investment advisor.
