Dear Investors,
12 wishes for the new year – (Thoughts of the week) Raymond James
Wars, inflation & yields
(Financial Markets)
One Year Of World Peace, Two ongoing wars (e.g.. Russia-Ukraine and Israel-Hamas), strained relations between the US and China, and China ramping up pressure to re-unify with Taiwan have kept geopolitics in the spotlight in 2023.
Inflation Closer To Two Percent on Financial Markets, The Fed’s preferred measure of inflation (core PCE) is receding much quicker than expected.
Ten Year Yield Starting With A Three, 10-year Treasury yields have plummeted from a peak above 5.0% in October to 3.8% as a Fed easing cycle is coming into focus in 2024.
Financial markets: unemployment, s&p & rates
Unemployment Rate Under Four Percent, The unemployment rate has remained at historically low levels despite the Fed’s attempts to slow down the economy.
S&P 500 Climbs To 5,000, An earlier than expected Fed pivot has driven the S&P 500 a stone’s throw away from reaching an all-time high of 4,796 – a level last seen in January 2022.
Six Percent Mortgage Rates, Home affordability was a major challenge in 2023 as mortgage rates climbed to their highest levels in more than 20 years.
Dividend, oil & junk bond
Dividend Growth Of Seven Percent, Dividend growth dipped below its long-term average of 7% in 2023 as investors chased higher yielding fixed income investments.
Oil Below $85 Per Barrel, After two years of volatility and price spikes driven by wars in Ukraine and the Middle East, some stability in oil prices would sure be nice.
Junk Bond Yields Below Nine Percent, The broad selloff in rates over the last few years drove junk bond yields above 9.5%, prompting concerns that it could be tough for issuers to refinance or service their debt.
Mega-cap, sectors & recession (financial markets)
Ten Percent Earnings Growth For Mega-Cap Tech, Mega-cap tech has dominated the S&P 500’s performance for more than a decade.
All Eleven Sectors In Positive Territory, For much of 2023, the S&P 500’s performance has been driven by narrow leadership.
Twelve Months Recession Free, The most telegraphed recession never materialized in 2023. While we are calling for the mildest of recessions in 2024, there is a reasonable possibility that the US economy could avert a recession again next year.
US presidential election likely will exacerbate market volatility – (Global Economy Spotlight) Wells Fargo
Eyeing a pivotal 2024
(Financial Markets)
Investors have anticipated a pivot to rate cuts by the Fed seven times since 2021, but stock rallies have been reversed in the last six instances.
Hopeful developments during much of this year risk disappointing investors in 2024, as cascading weaknesses become more evident.
The view is that the surge in real (inflation-adjusted) interest rates witnessed in 2023 likely will stress the economy further as the calendar turns, given the lagged effect of Fed credit tightening.
The US central bank holding the federal funds rate steady in the 5.25 – 5.50% range until an economic slowdown pressures inflation further, rather than cutting rates too soon and risking higher inflation.
Key pivot points are coming
(Financial Markets)
The key pivot points are coming in both the economic cycle and Fed policy. Disinflation should gather enough momentum through what we believe will be a moderate economic slowdown, setting the stage for rate cuts in the second half of 2024.
Furthermore, the US presidential election likely will exacerbate market volatility.
Given the base case for the economy, we reiterate our more defensive portfolio guidance, focusing on quality in both equity and fixed-income positions and exercising patience until signs of a new economic cycle emerge.
Economic sentiment
(Financial Markets)
Economic slowdown will continue to develop gradually, as key support from dominant consumer spending winds down in the first part of the new year.
Excess pandemic cash balances are exhausted for most income quintiles, credit delinquencies are rising, households are relying more on credit to sustain purchases.