Happy New Year! I hope everyone had a nice holiday season and is ready for a great 2024.
While the stock market was somewhat narrow in its participation for most of 2023, a great 4th quarter gave a huge boost to many stock portfolios. By the end of 2023, the S&P 500 had risen about 24%, the Dow Jones Industrial Average was up nearly 14%, and the NASDAQ Index (comprised largely of growth stocks) was up 43%! That brings those indices back to roughly the same levels they were in January 2022, some a little higher, some a little lower. The equal-weighted S&P 500, which measures each of the 500 S&P index stocks the same, was up about 12%, highlighting the fact that a few of the biggest stocks (The Magnificent Seven) did a lot of the heavy lifting for the S&P 500.
After a rough first 9 months, bonds had a great 4th quarter, as expectations for Fed rate cuts started to be priced in. Bonds may have rallied too far, too fast, but if the Fed is done, bonds will likely be an important part of a diversified portfolio.
You may recall that the market entered 2023 under tough circumstances, with many analysts calling for a recession. The word I used was “slowcession,” as we expected growth to slow considerably, although maybe not into recession. Some of the more bearish outlooks discussed the rate-hiking campaign by the Fed, fears of a consumer pullback as stimulus money ran out, declining corporate earnings, and geopolitical uncertainties. But by the end of the year, the real stories turned out to be the end of Federal Reserve rate-hiking, resilient spending by the US consumer, and continued corporate earnings growth. The market ended the year with expectations of a so-called “soft landing,” in which a recession is avoided even as growth slows down.
A key input for the Fed’s rate-hiking pause was the progress on moving inflation back toward the 2% target. While CPI peaked in June 2022 at 8.9% (remember egg prices?), that figure had dropped to 3.1% by November 2023. The labor market also continued to loosen, easing potential inflationary pressure from rising wages.
At the close of the year, the path of least resistance for the market appears to be higher, although a bearish case can always be made. There’s the possibility of a recession, and it’s unclear whether corporate earnings can remain strong in the face of headwinds from deflation, weakening pricing power, and elevated rates. If the US Dollar continues to lose strength, this should help stocks. Based on current inputs, I think the market can gain 5-10% in 2024, but the 4th quarter rally probably means that a pullback, or at least sideways action, is in store for the short-term.
Historically, election years tend to be favorable for the stock market, although elections are only one of the ingredients in the “stew” that is the stock market. 2008 was a bad year for the stock market, although I’d attribute that more to the banking crisis. 2000 was also tough, but the Dot Com Bubble was bursting then. You really have to go back to the 1930’s to find other bad election-year outcomes, and that was, of course, during the Great Depression.
There are also still large amounts of money in savings accounts and money market funds. I suspect that this money might not immediately jump back into stocks, but it may move to bonds, especially if short-term rates fall as a result of Fed actions. If that happens, market interest rate levels would likely come down, in turn making stocks more attractive investments.
With the new year comes new retirement plan guidelines, so if you’re contributing to a plan (IRA, 401k, SEP, etc.) you should check to see if your contribution limits have increased, especially if you turn 50 in 2024. Conversely, if you’re talking Required Minimum Distributions, we have those amounts calculated and can help you make those withdrawals.
There are a couple of market closures coming up. Martin Luther King Jr. Day is on January 15 and Presidents Day is on February 19. If you make estimated tax payments, January 16 is your deadline. If you turn 65 this year, don’t forget to enroll in Medicare, as penalties apply for failing to do so.
1099’s will be mailed beginning in mid-February. As always, amended and delayed 1099’s may be mailed as late as March 15. So, while you might not be able to file until you get those, we recommend using the next couple of months to prepare your other tax paperwork. You have until April 15 to make IRA contributions for 2023.
If you have questions about these or other financial matters, please don’t hesitate to call your advisor. If you know someone else who would benefit from any of this information, please don’t hesitate to share it with them. Or, you can ask us to reach out to them if that is more comfortable.
As always, these opinions are mine, and may or may not be the same as those of Raymond James. This is not a solicitation to invest, although we do invite you to review your portfolio with us to see if any changes should be made.
Past performance may not be indicative of future results. There is no assurance any of the trends mentioned will continue or forecasts will occur. Investing involves risk including the possible loss of capital. Asset allocation and diversification do not guarantee a profit nor protect against loss. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices generally rise.