Market Update: Thanks a Latte

By Morgan Christen
CFA, CFP, CDFA, CEO and CIO

Welcome,

Bloomberg reported there are over 383.2 billion latte variations at Starbucks. We have all been stuck behind that person with the annoying latte order (makes you feel a bit like Paul Rudd in Role Models?) Just give me a large coffee, please.

Speaking of variations, 2023 was a year with many variations of negative economic predictions, most of which did not come true. Take, for example, the ‘imminent recession.’

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Many pundits had us brace for a downturn in the economy; in fact Bloomberg in October of 2022 proclaimed a 100% chance of recession in 2023. I guess that was understandable, as the Federal Reserve hiked rates seven times in 2022 and continued into 2023. But the downturn did not show in 2023, as the economy grew at a 3.2% pace in the first three quarters, and the fourth is projected to be positive.

Inflation declined to 3.1% year-over-year in November and jobs were plentiful. The only thing that was down was consumer sentiment, but that did not stop the spending. 2023 ended with zero recession variations.

Year in Review

2023 marked the year AI stocks surged. The Pope wore an AI generated puffer coat and Open AI fired and then rehired CEO Sam Altman. Elon axed the cute little Twitter birdy and renamed it X.

2023 also was the year of the woman, as Taylor Swift became a billionaire while generating $4.6 billion in US GDP as fans spent (hotels, tickets, merch, nail salons, hair salons etc.) on the Eras tour. She was also named Time Magazine woman of the year. Not to be outdone, Beyonce’s Renaissance Tour is estimated to generate $4.5 billion in the US, and Sweden had a “Beyonce blip” as spending pushed inflation up 0.2%.

There was “girl math,” which suggesting buying on sale is a form of savings (I think we can get behind that – if you buy stocks). Even Fed Chairman Powell commented on Taylor and the ‘Barbie effect,’ saying, “The American consumer is in good shape.”

The Fed raised rates four times in 2023 before finally pausing. 2023 was the “hot strike summer” as Hollywood actors and writers, autoworkers and folks at UPS went on strike.

In March we endured a banking crisis, as the higher interest rates came home to roost. Three banks failed over five days while First Republic was gobbled up by JP Morgan and UBS scooped up Credit Suisse. Will Ferrell’s “pretty nice little Saturday” will have one less stop, as Bed, Bath and Beyond filed for Chapter 11 bankruptcy.

We learned a lot about diabetes drugs that are now heavily prescribed for weight loss. In October, after three years, people started making payments on their student loans. The US Senate passed a debt ceiling package, effectively kicking the can to January 1, 2025. Finally, the debt ceiling and the spending caused Fitch to downgrade US debt to AA+.

Stocks

Our domestic markets produced strong returns in the final quarter of the year. Across the board, from small cap to large cap and from growth to value, all had impressive moves. Large growth stocks took the crown thanks to the magnificent seven.

Internationally, growth stocks were the leader for both the quarter and year, but they underperformed US markets. The year looked to be flat but sprung to life in the fourth quarter as investors believed the Fed would begin to cut rates.

As Peyton Manning is quoted as saying, “you hear about how many fourth quarter comebacks that guy has and I think it means a guy screwed up in the first three quarters.” Maybe the markets did not screw up in the first three, just lackluster, but you need to be in the game to get the win.

Bonds

Interest rates declined over the fourth quarter, but essentially mirrored 2023. The Fed is on hold for now and has become more dovish (less restrictive) in their most recent conversations. Rates were the driving force for the stock market’s jump, but also produced nice returns in the bond market.

There is an inverse relationship between interest rates and bonds. As one goes up the other goes down (and vice versa). The moves are more pronounced the further you go out on the yield curve. With that being said, 30-year bonds performed the best in the final quarter of the year, but still underperformed shorter term bonds for 2023.

Conclusion and Various Predictions

We enter 2024 with continued conflicts in Ukraine and the Middle East, along with civil wars in Africa, Asia and Latin America. Countries are facing rising costs of climate disasters and in some cases that is producing mass migrations of refugees. The consumer balance sheet is weakening as credit card and auto loan delinquencies are increasing. Although they are increasing, they are still manageable, as household debt payments as a percentage of disposable income is low.

With that background, corporate leaders are growing more confident about the global economy, according to Bloomberg. The prospects of cuts in Fed interest rates sparked the 2023 year-end rally in stocks, which could pour over to 2024. We are also looking at inflation easing, all helpful for the consumer (two-thirds of GDP). Along the lines of consumers, the over-50 cohort accounts for 50% of consumer spending and controls 83% of household wealth (largely home ownership) according to Bloomberg. Thank you Boomer! Keep on spending!

2024 will be a big year for elections. Not only will the United States be having one, but so will 64 other countries. If you want to see the impact of AI, these elections will be the petri dish. Let the negative ads begin.

2024 will see us transition from strong economic growth and high interest rates to a more subdued growth but with lower rates. The soft landing appears to be in place; however, a soft landing and a shallow recession are close cousins. Both assume a slowdown; it is just the magnitude. Bond rates will remain elevated, which is good for savers and account diversification. We should see a continued push to re-shore, bringing supply chains closer to home. That is good for local economies, Mexico, supply chain security, but potentially inflationary.

Diversification hurt in 2022, as all aspects of the markets were hurt. 2023 was a win for diversification and we see it looking even better in 2024. AI will still be on investors’ minds, but as they gobble up stocks attached to AI, they jacked up the valuations. The boring dividend paying stocks did not receive love in 2023 to the extent the tech stocks did. We anticipate a move to quality and as a corollary, dividend stocks. If rates move down and jobless claims remain in check, we should have a good year in the market.

The pieces look to be in place for a good year for investors. Currently there are jobs, inflation has eased, bonds are attractive, and the Fed has become less aggressive. There are also the negatives, but as we saw in 2023 those who ran for the safety of T-bills and money markets had a less than great year. While we do not anticipate the returns of 2023, we see many variations in outcomes, but the skew looks positive.

As always, we thank you for your continued support. January is a good time to work on your financial resolutions and we stand ready to help.

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DISCLOSURES

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Stock is the capital raised by a corporation through the issue of shares entitling holders to an ownership interest of the corporation. Past performance is no guarantee of future results, and there is always the risk that an investor may lose money. Diversification neither assures a profit nor guarantees against loss in a declining market. The information contained herein is based on internal research derived from various sources and does not purport to be statements of all material facts relating to the securities mentioned. The information contained herein, while not guaranteed as to the accuracy or completeness, has been obtained from sources we believe to be reliable. Opinions expressed herein are subject to change without notice. Information may be dated material. Charts notated with source.

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