HWM Market Recap - January 2024
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Heading into 2022, with the impact of the COVID-19 pandemic showing signs of subsiding and the prices of goods and services rising, investors' assumptions about the year to come were that the Fed would begin to increase interest rates gradually and that there would be a short-term increase in inflation (economists refer to this as inflation being 'transitory'). Despite this, investors generally believed that these would not be enough to slow the momentum of the stock market, and many predicted stocks would continue to hit new highs. In the end, the S&P 500 fell nearly 20% that year – the worst annualized performance of the index since the Great Recession of '08-'09.
As we entered 2023, the big question on investors' minds was not if there would be a recession but when. Moreover, how bad would said recession be, considering the Fed was unsure when they would stop hiking rates as inflation was showing no signs of slowing down? Ultimately, the S&P 500 had a massive rally and finished the year up over 20%.
Here's what some of the largest money institutions are saying about their economic outlook for 2024:
Bank of America: "We expect 2024 to be the year when central banks can successfully orchestrate a soft landing, though recognize that downside risks may outnumber the upside ones."
BlackRock: "Our bottom line for 2024: Investors need to take a more active approach to their portfolios. This is not a time to switch on the investing auto pilot; it’s a time to take the controls. It’s important to be deliberate in taking portfolio risk, in our view, and we expect to deploy more risk over the next year."
Charles Schwab: "Our outlook for 2024 is for a gradual U-shaped recovery composed of seemingly chaotic movements in economic data with turning points in policy rates and earnings growth. Investors may have to step back a bit to see the bigger picture and look beyond the noise and volatility."
Citi: "Our 'Slow then grow' thesis sees a deceleration in economic activity during the early part of 2024, but no synchronized recession, followed by an economic acceleration later in the year."
Fidelity: "Our base case for 2024 is a cyclical recession... Resilience driven by fiscally supported consumers and companies has been the biggest surprise of 2023, but barring something extraordinary, next year we expect to see the economy finally turn lower."
Goldman Sachs: "We continue to see only limited recession risk and reaffirm our 15% US recession probability. We expect several tailwinds to global growth in 2024, including strong real household income growth, a smaller drag from monetary and fiscal tightening, a recovery in manufacturing activity, and an increased willingness of central banks to deliver insurance cuts if growth slows."
JPMorgan: "As we approach 2024, we expect both inflation data and economic demand to soften, as the tailwinds for growth and risk markets are fading. Overall, we are cautious on the performance of risky assets and the broader macro outlook over the next 12 months, due to building monetary headwinds, geopolitical risks and expensive asset valuations."
Morgan Stanley: "As central banks walk a fine line between inflation and recession, watch for lackluster economic growth in 2024 and 2025, especially in developed markets. Investors should look for opportunities in fixed income and remain cautious on emerging markets and commodities."
Vanguard: "Vanguard anticipates that the United States and other developed markets will grapple with mild recessions in coming quarters and that central banks will cut interest rates, likely in the second half of 2024, amid growth challenges and inflation falling toward the banks’ targets."
Wells Fargo: "We believe it would be premature to claim that the economic storm has passed, because the battle against inflation has not yet been decisively won... Even if Fed policymakers are able to pull off a 'soft landing,' real GDP growth in 2024 likely will be subpar, at best, due to the elevated level of real interest rates that will be needed to wring inflation out of the economy."
Obviously, the performance of the S&P 500 is not the only indicator we use to track the temperature of the economy. There are also job reports, housing, manufacturing, consumer sentiment, etc. We keep an eye on all of these indicators and use them as a barometer to help steer our investment strategy.
As 2024 kicks off, the U.S. is clearly advancing toward an economic slowdown this year. The debate on a 'soft' versus 'hard' landing continues to rage on (if you missed the newsletter where we weigh in on this subject, check it out here). Inflation has been dropping. Proponents of the soft landing narrative primarily point to this, along with the persistent resilience of the labor market and other strengths in the economy, as the primary reasons for the economic robustness we have seen thus far. Those who believe a hard landing is to come tell a different story. While yes the inflation rate is decreasing, prices are still elevated and showing little sign of reducing, leaving household budgets pinched. Consequently, as the rate of price increases has slowed and people are spending as much as ever, families are forced to buy fewer goods and services. Moreover, we are seeing low consumer confidence, low general business outlook for the next six months, and the housing market continuing to be stuck in a rut.
Still many questions remain unanswered about the economy. For example, one unpredictable risk is the ramifications of geopolitical uncertainties. No doubt, we will be watching closely as events will likely unfold rapidly. The predominant question for the year is how the Fed and the federal government will act. As we wrote last month:
...the Fed has the difficult job of finding the Goldilocks zone of not leaving a legacy of contributing to long-term inflation and leaving interest rates too high for too long, causing a hard landing.
For now, we stick to our strategy as long-term investors, ride out the waves as they come, and adhere to our analytical approach to the markets by allowing our evidence-based research to guide our safety-first philosophy.
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Monthly Changes in Indices
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Monthly Performance By Sector
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In a widely expected move, the Federal Reserve kept interest rates unchanged for the Fed's final meeting of 2023. This marks the third consecutive meeting where they have chosen to leave rates at their current levels. The Fed also signaled that it foresees cutting rates three times in 2024.
The Consumer Price Index (CPI) rose 0.1% in November after being unchanged in October. Over the past 12 months, the index is up 3.1%. Core CPI, which excludes food and energy, rose 0.3% in November after rising 0.2% in October.
The Personal Consumption Expenditures Price Index (PCE), the Fed's preferred inflation measure, decreased to 2.6% annualized in November (from 2.9% in October). Core PCE, which excludes food and energy, increased 0.4% month-over-month, and personal income increased 0.4% monthly.
The Job Openings and Labor Turnover Summary (JOLTS) showed that the number of job openings changed little in November, while there was a decrease in the number of hires and individuals separating from their employment. This comes after U.S. job openings pulled back in October to their lowest level since early 2021. According to the Employment Situation Summary, the U.S. economy added 216,000 jobs in December, and the unemployment rate remained at 3.7%.
The University of Michigan's Consumer Sentiment Index soared 14% in December, gaining back its declines from the last four months. The spike in the index is rooted in consumers' view that there will be substantial improvements in inflation. The surveys showed that year-ahead inflation expectations decreased from 4.5% in November to 3.1% in December – the lowest reading since March 2021. Similar research from the Federal Reserve Bank of New York demonstrated that median consumer expected inflation for the year ahead declined by 0.2% in November to 3.4% – the lowest since April 2021. Median inflation expectations for the next three and five years remained unchanged at 3.0% and 2.7%, respectively.
As reported by Bloomberg, the share of mortgage-free U.S. homes increased by 5% from 2012 to 2022. Therefore, almost 40% of U.S. homeowners own their homes outright as of 2022. More than half of those owners are retirement age.
Estimates of U.S. retail and food sales for November increased 0.3% month-over-month, up 4.1% from a year ago.
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Holzberg Wealth Management is a family-owned and operated financial planning and investment management firm based in Marin County, CA. As your financial advisors, we serve you as a fiduciary and are fee-only, so we never receive commissions of any kind. We help individuals and families like you in the greater San Francisco Bay Area and virtually nationwide with the financial decision-making process to organize, grow, and protect your assets.
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