Welcome to the first edition of “Ethel’s Diamond Post.” in 2024. The leftovers are gone, the Christmas tree and accessories are down, and the Kansas City Chiefs made it to the playoffs, but what can we expect from the stock market? Who’s crystal ball will be “spot on” this year? The S&P 500 ended 2023 with more than 24 percent gain as inflation eased, a resilient economy, and the prospect of interest rates pausing. After a painful 2022, the Wall Street benchmark returned stunningly to post its best performance since 2021. The rebound was driven by a return to growth stocks versus value, a massive runup in technology names (the Magnificent Seven), and a long-awaited Federal Reserve that scheduled interest rate cuts in 2024.
However, the “Magnificent Seven” companies fueled the broader market, accounting for two-thirds of the gains in the S&P 500 last year. The companies included Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta Platforms, and Telsa, so if your portfolio did not have exposure to the seven rock stars, you missed out on a stellar performance. Nvidia was number one in delivering an impressive gain of 239 percent. At the same time, AI (artificial intelligence) was a key driver for the Magnificent Seven. However, the recent rally has stimulated more companies to enter the AI space. The technology sector should continue to be vibrant for 2024 but broaden across the industry and not just be restricted to a few good names.
The U.S. Federal Reserve utilized the fresh signal from the consumer price data as a barometer to determine if inflation is embracing the 2 percent target. If so, this would allow them to reduce interest rates in the coming months. The result shows that inflation rose to 3.4 percent in December 2023 from 3.1 percent the previous month. The Feds are looking for convincing evidence that the pandemic-era spike in inflation has dissipated to the degree that they can start easing monetary policy and reducing the benchmark interest rate. Glancing at the market’s expectations surrounding interest rates, traders are pricing in a 75 percent chance that the Federal Reserve will deliver a 25-basis point rate cut at its monetary policy meeting in March.
Next, investors are hopeful that 2024 will be a typical year. But what is a typical year, and what can we expect from it? Many people define a regular stock market as stable and predictable. Of course, we all hope for that, but those expectations are unrealistic. A traditional market makes most investors seasick, especially those who look too often or believe everything they hear about the market is trustworthy. No one has been able to predict the market consistently with a high degree of accuracy, including Warren Buffet and Ethel J. Davis. The 2024 presidential election may be one of the biggest market-moving catalysts for the next 12 months. While it’s too early to predict a potential winner, the current polls believe it will be a rematch between Democrat Joe Biden and Republican Donald Trump – but who knows what will happen?
The upcoming election year will bring challenges for investors and politicians alike. Unfortunately, the S&P 500 record during U.S. Presidential election years suggests investors could experience increased volatility and lackluster returns for 2024. Remember that past performance does not guarantee future returns, and there have only been 17 presidential elections since 1952. Since 1952, the S&P 500 has averaged a 7% gain during U.S. presidential election years. The good news for investors heading into 2024 is that the S&P 500 has not declined during a presidential re-election year since 1952 and has averaged a 12.2% annual gain in re-election years. However, 12 months after an election, the market’s performance tends to be stronger than usual, regardless of which party is in office. We do not believe that the election or the party elected will have a material impact on market returns in election years. Recessions matter much more to financial markets than political parties.
From an investment perspective, we do not know what stocks or bonds will do today, next week, or next month. Plus, at VZD, we do not allow emotions to influence our investment decisions. We learn that stocks will continue their advances over the long term but not without volatility. Reacting to short-term swings in the market means stress and oppression, and no one is impressed. I advise all investors to stop monitoring their accounts daily, believing every word they hear from the media, and listening to investment pundits too much. Ask yourself, do you have faith in the market? Or do you believe in a theorist with no basis for spewing inaccuracies or made-up editorials? Remember that every bear market has been followed by an enduring bull market for over the last hundred years. The real risk is being out of the market, sitting on the sidelines waiting to re-enter.
Diversification is your friend. VZD has been adding fixed income to minimize risk volatility and increase the income orientation. We do not know which direction the market will turn at any given time. Diversification between stocks, Exchange-Traded Funds, bonds, preferred stocks, and real estate investment trusts (REITs). We research the credit qualities and durations, which is the rationale behind using ETFs to reduce portfolio volatility while positioning to capture returns wherever and whenever they occur. With attractive valuations and yields still near 15-year highs, fixed-income markets can offer an array of opportunities with the potential to weather multiple macroeconomic scenarios. We will continue to utilize fixed-income ETFs versus traditional bonds. A diversified portfolio means building and rebalancing a portfolio with various securities and investments in multiple industries that will protect your assets from significant swings. Economic factors, monetary policy, and corporate earnings impact markets. With all of this in mind, we recommend staying the course, living within your means, and using discipline during periods of high volatility.
VZD handles most of the Required Minimum Distribution requests at the beginning of the year. We realize this takes time and appreciate your patience; every client matters to us. We will be calling to schedule portfolio reviews. Please know that we recognize the current investment environment can be an emotional rollercoaster. If you are worried or concerned or need to express your feelings, please do not hesitate to call Ethel.
Here is to a New Year and better days ahead!
With Gratitude,
Ethel, Nikisha, and Nate
