As we welcome in 2024, it’s impossible to ignore the remarkable resurgence of stocks last year. They rose from the dead, showcasing excellent gains across major indexes. However, you might be surprised to see on the graphic below that 2023 fell into the most common bucket of returns. It also really captures just how much of an anomaly 2022 was for the S&P 500.
This year reaffirmed – yet again – the prevailing bias of stocks is to the upside. It’s 6x more likely to gain >+15% than to lose <-15%. Humans are hard-wired to avoid risk and that is why almost all individual investors underperform. This year also showed that bonds are truly fixed instruments where something has to give when interest rates stop going up. Eventually, they will pay you off.
Rather than a multi-page soliloquy about where we go from here, there are a few other charts I’d like to display to help guide us.
The Federal Reserve is officially projecting 3 rate cuts in 2024 but the options market is pricing in even more:
The thought process here is that the Fed is bluffing higher rates for longer. They were way too late stopping inflation so they don’t want to be late stopping a recession this time around. A soft landing seems possible and they don’t want to blow it.
Bonds just saw a huge jump in the last two months as rates dropped quickly in the marketplace. Despite this, they are still historically high for the last 20 years and bonds probably aren’t a bad place to park some money moving forward. Those juicy yields on savings accounts are likely going to be trickling back down soon. Bonds offer a way to capitalize on declining interest rates.
As for stocks, US price-to-earning ratios are above their 25-year average by a decent margin. This doesn’t mean prices need to go down because they can remain elevated or earnings could catch up. But global stocks are well below their average and offer some real value here. I think it is important to stay diversified because we could see some catch-up from around the world.
Other countries have been lagging behind us in the inflation battle, interest rate cycle, and subsequent market recovery. Now, things are trending in the right direction for most of them too. They could see the rally we just did.
On the political front, we are entering an election year where stocks have always been positive after a down midterm year.
I’m sure we will get plenty of fireworks one way or the other but I believe it is important not to mix politics too much with your portfolio. It’s tempting but results in the market can often be counterintuitive to real-life events. For instance, many are puzzled by low consumer confidence while stocks rally and the economic data being released shows that the economy is still strong.
I’ll leave you with an excerpt from the new book, “Same as Ever”, by financial writer Morgan Housel.
Investor Jim Grant once said:
“To suppose that the value of a common stock is determined purely by a corporation’s earnings discounted by the relevant interest rates and adjusted for the marginal tax rate is to forget that people have burned witches, gone to war on a whim, risen to the defense of Joseph Stalin and believed Orson Welles when he told them over the radio that the Martians had landed.”
That’s always been the case. And it always will be the case.
Every investment price, every market valuation, is just a number today multiplied by a story tomorrow.
The numbers are easy to measure, easy to track, easy to formulate. It’s getting easier as almost everyone has cheap access to information.
But the stories are often bizarre reflections of people’s hopes, dreams, fears, insecurities, and tribal affiliations. And they’re getting more bizarre as social media amplifies the most appealing views.
Here’s to a great 2024. I hope we get some good stories.
This post is an excerpt from a private client newsletter on 1/2/2024.