We hope you had a wonderful holiday season and are having a wonderful start to your New Year! After recovering from my third bout of Covid in December, our household was able to enjoy a very nice Christmas holiday. In addition to our annual trek up to Pennsylvania for Christmas Eve, we were grateful for safe travels back to Virginia for some more family time. After the brutal market conditions of 2022, this end of the year report should be a much more pleasant experience to read than my last year’s advice which was to “skip” reading it if you could.
As we come out of a year that almost no one on Wall Street saw coming, we will cover both the December year end market performance and the 2024 outlook
December Year End Summary
As we began December, all eyes were on the Federal Open Market Committee (FOMC) meetings which concluded on December 13th. Investors and the markets wanted verbal confirmation that the committee agreed with the progress which was made during the 4th quarter on cooling inflation data and reduced bond prices. The question on everyone’s mind was, “will the Federal Open Market Committee keep interest rates unchanged just like they did in the October/November meetings?” Well, the committee not only agreed with the picture that was being painted of the economic data points, but Fed members opened the door for 3 potential rate cuts in 2024, based on the forward looking dot plot (or data).
This stance, by the FOMC committee, was extremely well received by investors and the markets. After an extremely strong November market uptrend, December took the baton and sprinted into the end of the year finish line. The S&P 500 finished the month up +4.42% and crossed the end of the year line +24.23%. The Dow Jones posted a +4.84% for the month of December and clocked in a yearly return of +13.70%. The momentum created from this type of confirmation certainly elevated markets higher, and as we came into the last days of December, you could see that the markets got a bit carried away as the many areas of the market became overbought.
If you have read the monthly reports throughout this year, you would agree that this year was a welcome sight after a horrible 2022.
With a wonderful year bounce back from terrible economic conditions ……. This leads us to what could possibly come next? With the elevated finish to the year, we can expect that some repricing will come in January before there could be another leg up or a formal confirmation to the year-end rally.
2024 Outlook:
Heading into the new year, we find the economy is growing at a solid pace, the labor market is tight, inflation is decelerating, and the housing market shows early signs of a rebound. Economic data indicates that higher interest rates have yet to make a significant impact. The markets trade near all-time highs, and bonds just staged their best quarter since 1989. There is a growing sense of optimism, but can the economy live up to that optimism?
Multiple themes suggest the U.S. economy experienced a structural shift during the pandemic. Cross country migration during the pandemic is driving increased government investment today as states and local municipalities expand and build infrastructure to meet increased demand and usage. This translates into new schools, more expansive road networks, new neighborhoods, and airport expansions. In addition, there is still a housing shortage after the U.S. underbuilt following the 2008 financial crisis. Remote work is a new phenomenon, but it doesn't appear to be going away anytime soon. Fridays and Mondays are no longer constraints on taking a weekend trip, which could lead to more spending on services and experiences. It takes time for higher interest rates to work their way into the economy, and the economy could slow in 2024. However, these structural changes demonstrate how today’s economy differs from the pre-pandemic economy.
Looking ahead at the calendar, the 2024 presidential election will grab headlines for most of the year, with the first primary elections taking place in January. It will be a busy time as candidates discuss their platforms. There will be a lot of talk about new policies and big changes, but it’s important to keep the bigger picture in mind. Election headlines tend to be more noise than anything of substance. Elections create uncertainty and volatility, but history shows us that economic growth and corporate earnings ultimately drive markets over the long term. Our focus in 2024 will be on the growing list of non-political themes, such as interest rate cuts, geopolitical events and the post-pandemic changes impacting the economy.
Every year brings its own challenges, but over time investors have continued to be rewarded for ignoring period cycle discomforts and keeping a disciplined long-term approach.
