Market Viewpoints – Winter 2024

Keith Bonjour, Portfolio Manager
Keith Bonjour, CFP® Vice President, Portfolio Manager

Both stock and bond markets closed in positive territory to end 2023 despite all the market worries throughout the year. Bonds staged a strong rally in both November and December, after turning negative earlier in the year, to break their two-year losing streak. Stocks also rallied in both November and December to finish the year on a high note after pulling back from August through October.

The Federal Reserve held rates steady at between 5.25%-5.50%, without adding an additional rate hike in the last quarter of 2023, which gave a boost to both the stock and bond markets. It seems likely the Fed will now hold interest rates steady for the first part of the year with rate cuts possible as early as March, but the likelihood is stronger they wait until at least May before starting a new rate cut cycle.

As the Fed held their own rates steady in the 4th quarter, we saw interest rates around the country decrease, spurring the bond market rally and increasing expectations that the Federal Reserve would begin its own rate cut cycle at some point in 2024. The bond market tends to increase, historically, prior to the Federal Reserve starting to reduce the Fed fund rate.

Estimates vary widely of when the Fed will choose to start cutting rates and by how much, but they are expected to cut rates several times this year. This should begin to take some pressure off markets as the Fed will be moving to a more accommodative posture assuming inflation continues to move in the right direction.

The economy proved to be much more resilient in 2023 than expected going into the year with consumer spending remaining strong, unemployment staying low, and both wage and price inflation cooling throughout the year. This led to better company earnings and strong economic growth which drove robust gains for the stock market last year. Markets are taking a more cautious approach as we move into the New Year. Election years typically see some increased volatility, at least in the first half of the year, and 2024 is unlikely to be an exception. However, chances have increased for the Federal Reserve to engineer a soft-landing of the economy without causing a recession. Recession odds are not zero, but they have come down from where they were at this time last year.

If the economy can avoid a recession this year, growth is still expected to slow meaningfully compared to last year. Lenders are becoming increasingly more cautious when underwriting new loans.

The unemployment rate remains low but has been increasing. New job openings continue to fall and are now well off from their peak. Also, revolving credit and delinquencies have been on the rise which shows that tighter Fed policy is having its intended effect to slow down the economy. The Fed now must prove that they can pivot at the right time to begin to ease financial conditions before the economy slows too much. As I mentioned previously, recession odds have been lowered but we are not out of the woods yet. There is a still a risk that consumers pull back more meaningfully this year, slowing growth and hurting company profits. There is also a risk that certain areas of inflation prove sticky and begin to move back upwards which would force the Fed to readjust their rate cut projections.

We continue to be mindful of all the risks the market faces in 2024, from a possible Fed policy mistake, inflation remaining elevated, company earnings coming under pressure, and continued geo- political risks. We recommend staying the course with your investment objectives with the understanding that markets go through cycles and both the stock and bond market show positive returns at higher percentage rates the longer the time-period measured.

Please communicate with us if any short-term cash needs arise so we can look for opportunities to be pro-active when raising cash for any necessary distributions, which helps to protect against possible short-term negative moves in the market. We appreciate the trust you have placed in us and will continue to make prudent investment decisions as we navigate markets in 2024.