2024 Outlook
General Thoughts
- Ignore the parade of annual market forecasts. Markets aren’t predictable in 12-month increments…now or ever. Be wary of anyone that believes otherwise.
- Instead focus on things that can be controlled: having a well-constructed plan, matching your allocation with your plan, tax saving strategies, and legacy planning.
- Historically, building and preserving wealth over the long run is done through owning businesses (which is what owning stocks is) and real estate.
- If you’re worried about short-term unpredictability of inflation, interest rates, and a variety of other factors. You should consider cash and bonds for any money you need in the next 3-5 years.
- There may be a potential of greater returns if you hold long term investments a minimum of 3-5 years.
- Make each category of investments (short-term, intermediate-term, and long-term) as productive as possible.
Current Markets
- Short-term: Some money markets are paying over 5%. I believe rates could start falling in the next 6-12 months; If you have idle cash, please reach out to discuss potential opportunities that may be available.
- Intermediate term: after 36 months of anemic returns, bonds could be poised to return 6%+ per year for the next several years. The current level of interest rates increases the likelihood of decent bond returns.
- Long-term: the stock market was up 26% in 2024. Sentiment has shifted from fear to greed. The 5-year outlook for individual stocks still looks good, but don’t get caught up in the euphoria from last year. You may want to consider sticking to individual companies’ vs the overall market. We can also recommend additional long-term investments if interested.
Our Investment Playbook For 2024
- Overall, we are currently favoring bonds a bit more than stocks. They both look attractive, but bonds look slightly better on a risk adjusted basis. We are looking to increase stock exposure on dips in the market as that would shift the balance in favor of stocks.
- Now that interest rates have increased, we have repositioned cash and bonds to take advantage of those higher rates and the potential for rate decreases in 2024.
- We continue to look to add quality businesses to portfolios that have a competitive advantage, excellent management, and sell for attractive prices.
- There are many private funds that are now available with more liquidity than there has been in the past. We are looking to increase exposure to privately held businesses, venture capital, real estate, and debt.
2024 Outlook
As we start another lap around the sun, Wall Street is buzzing with forecasts for 2024. Reflecting on my email at the beginning of 2023, I noted that when it comes to forecasting, investment strategists, like the emperor in the children’s tale, often “wear no clothes.” 2023 only served to underscore this point. Defying an overwhelming consensus on Wall Street for a recession and stock market correction, the stock market soared over 24% and the last economic growth reading was a robust 5%+ (inflation-adjusted).
It’s not that I had a crystal ball. I can assure you I have no better idea of what will happen than the strategists. My 25 years in the field have simply taught me that these forecasts are more often misses than hits, and not consistently wrong enough to warrant a contrarian approach either.
So why are the forecasts paraded out every year? And even more perplexing, why are we still compelled to see them? I’m reminded of the Gell-Mann Amnesia effect, coined by author and movie producer Michael Crichton from his musings with his friend and physicist Murray Gell-Mann.
Crichton described it in a speech over 20 years as follows:
While this effect isn’t a perfect analogy for Wall Street forecasts, it does reflect our annual amnesia about their accuracy. History overwhelmingly shows, humans are terrible at predicting the future.
So rather than focus on forecasts of the unknowable, we would rather focus on sound activities that help build and preserve long-term wealth.
As we step into 2024, here are our primary areas of focus for you and your family:
Your Overall Plan
- Cashflow and Spending – Helping you make sure you can support your lifestyle through retirement and accomplish any other goals you have as well. Ensuring a balanced approach to your spending – not too lavish to risk future financial security, yet not so frugal that you miss out on enjoying life and helping others.
- Tax Strategies – While we don’t give tax advice per se, we do spend a lot of time thinking about taxes and how you might benefit from different strategies. For example, over the past year we spent a lot of time harvesting losses to be used to offset capital gains either now or in the future. We will continue to look for opportunities to potentially create tax savings for you. A dollar saved in taxes is equal to a dollar earned in after-tax return. (Wells Fargo Advisors Financial Network is not a legal or tax advisor.)
- Legacy Planning – In collaboration with your attorney, we want to help ensure your wealth is transferred as you intend, taking into account family dynamics and charitable goals, while attempting to minimize unnecessary taxes.
Aligning Your Investments to Your Plan
- Aiming to make sure you have enough in short-term investments to cover your spending needs for the next 6-18 months.
- Aiming to make sure you have enough in intermediate-term investments to cover you the next 3-5 years.
- With the remaining dollars in long-term investments focused on helping maximize growth and outpacing inflation.
By keeping enough in short and intermediate-term investments, our goal is to negate the impact of the unknowns and can capitalize on the returns available for the long-term. We will still have some mistakes over the long-term, but our likelihood of being right goes up proportionally with the amount of time we have for our thesis to play out. We believe the best way to mitigate the short-term risks of the stock market is by being a long-term holder and ignoring the temptation to try to trade around downturns. As you can see below, having a holding period of at least three years and preferably five years or more puts the historical odds dramatically in your favor.
As we start another lap around the sun, Wall Street is buzzing with forecasts for 2024. Reflecting on my email at the beginning of 2023, I noted that when it comes to forecasting, investment strategists, like the emperor in the children’s tale, often “wear no clothes.” 2023 only served to underscore this point. Defying an overwhelming consensus on Wall Street for a recession and stock market correction, the stock market soared over 24% and the last economic growth reading was a robust 5%+ (inflation-adjusted).
It’s not that I had a crystal ball. I can assure you I have no better idea of what will happen than the strategists. My 25 years in the field have simply taught me that these forecasts are more often misses than hits, and not consistently wrong enough to warrant a contrarian approach either.
So why are the forecasts paraded out every year? And even more perplexing, why are we still compelled to see them? I’m reminded of the Gell-Mann Amnesia effect, coined by author and movie producer Michael Crichton from his musings with his friend and physicist Murray Gell-Mann.
Crichton described it in a speech over 20 years as follows:
“You open the newspaper to an article on some subject you know well. In Murray’s case, physics. In mine, show business. You read the article and see the journalist has absolutely no understanding of either the facts or the issues. Often, the article is so wrong it actually presents the story backward-reversing cause and effect. I call these the “wet streets cause rain” stories. Paper’s full of them.
In any case, you read with exasperation or amusement the multiple errors in a story, and then turn the page to national or international affairs and read as if the rest of the newspaper was somehow more accurate (…) You turn the page and forget what you know.
That is the Gell-Mann Amnesia effect (…) We believe against evidence that it is probably worth our time to read other parts of the paper. When, in fact, it almost certainly isn’t. The only possible explanation for our behavior is amnesia.”
While this effect isn’t a perfect analogy for Wall Street forecasts, it does reflect our annual amnesia about their accuracy. History overwhelmingly shows, humans are terrible at predicting the future.
So rather than focus on forecasts of the unknowable, we would rather focus on sound activities that help build and preserve long-term wealth.
As we step into 2024, here are our primary areas of focus for you and your family:
Your Overall Plan
Cashflow and Spending – Helping you make sure you can support your lifestyle through retirement and accomplish any other goals you have as well. Ensuring a balanced approach to your spending – not too lavish to risk future financial security, yet not so frugal that you miss out on enjoying life and helping others.
Tax Strategies – While we don’t give tax advice per se, we do spend a lot of time thinking about taxes and how you might benefit from different strategies. For example, over the past year we spent a lot of time harvesting losses to be used to offset capital gains either now or in the future. We will continue to look for opportunities to potentially create tax savings for you. A dollar saved in taxes is equal to a dollar earned in after-tax return. (Wells Fargo Advisors Financial Network is not a legal or tax advisor.)
Legacy Planning– In collaboration with your attorney, we want to help ensure your wealth is transferred as you intend, taking into account family dynamics and charitable goals, while attempting to minimize unnecessary taxes.
Aligning Your Investments to Your Plan
- Aiming to make sure you have enough in short-term investments to cover your spending needs for the next 6-18 months.
- Aiming to make sure you have enough in intermediate-term investments to cover you the next 3-5 years.
- With the remaining dollars in long-term investments focused on helping maximize growth and outpacing inflation.
By keeping enough in short and intermediate-term investments, our goal is to negate the impact of the unknowns and can capitalize on the returns available for the long-term. We will still have some mistakes over the long-term, but our likelihood of being right goes up proportionally with the amount of time we have for our thesis to play out. We believe the best way to mitigate the short-term risks of the stock market is by being a long-term holder and ignoring the temptation to try to trade around downturns. As you can see below, having a holding period of at least three years and preferably five years or more puts the historical odds dramatically in your favor.
Investment We Are Currently in Favor Of
- Short-term investments: money market and high-quality short-term bonds are now yielding more than 5%. These yields may decline during the year if Fed decides to start cutting rates, which we think is likely. Don’t keep too much in short-term investments as we think it is likely rates may fall. It could make sense to lock in current yields if you don’t need those funds in the near term.
- Intermediate-term investments: Bonds look poised for several decent years. Following over a decade of low interest rates and 36 months of poor performance, bonds are finally providing a meaningful yield and may even see price appreciation if rates fall. In the portfolio we have discretion over, we had positioned bond portfolios for rising rates last year, and we repositioned bond portfolios near the end of 2023 to take a more neutral position on interest rates and lock in higher yields. It appears the Fed is done hiking interest rates and the next move is likely rate cuts. If we truly are nearing the end of the rate hiking cycle, bonds are likely attractive whether rates fall this year or not.
- Long-term investments: many individual stocks look very attractive right now. However, this is a market where we favor individual companies over the general market. At the beginning of last year, after a near 20% decline in stocks in 2022 I wrote:
“The time to buy straw hats is in the winter and right now it is winter for the stock market. Have we reached the low temperature in this stock market winter … that is unknowable (see above), but I am willing to invest money based on the idea that summer is coming, it is just a matter of when.”
Today, we find ourselves in a much different position. The stock market was up over 24% in 2023 and investor sentiment has shifted from fearful to greedy as noted by CNN’s Fear & Greed Index which weights 7 different market indicators to attempt to measure the level of fear and greed in the market.
It is important to realize that just because the market was up last year, doesn’t mean it will be down this year. While it often feels like it is just moving up in down, the stock market has historically made one new high after another as noted in the chart below. It is a perpetual long term compounding machine. (Note the logarithmic scale. Just to fit this chart on a page, you have to make the increments at the bottom worth $5k and adjust those same increments at the top to $1.28 million. Such is the amazing power of compounding and the stock market.)
With that said, as Warren Buffett reportedly has said:
“The time to be greedy is when others are fearful and the time to be fearful is when others are greedy.”
So, we think now is a time to keep a sharp pencil when evaluating new investments. Don’t get caught up in last year’s returns. We are still very optimistic about the future and expect stocks to do well over the next five years, but we are in an environment where having a level of cautiousness is warranted as well.
Specifically, heading into 2024, the portfolios we have discretion over are close to neutral, leaning slightly more towards bonds and cash than stocks today. As an example, if your portfolio typically targets 55% in stocks, today we are managing to 50-55& stocks plus or minus. We don’t believe investors should be overly defensively right now, there are too many opportunities to be defensive. However, bonds and cash are attractive at these yields on a risk adjusted basis, so having a slight tilt in their direction while focusing on the long term for stocks makes the most sense to us. If we do have a price drop in stocks, we believe it will be appropriate to buy up to a neutral or even an overweight stock allocation.
One final thought…
We are heading into a contentious Presidential election year. Over the years, I have seen hundreds of reports on historical election data and the markets. Everyone wants to gleam some edge by parsing the historical databases a new way every election. From all of that data, I believe that most elections have little to no impact on the stock market. I am not saying they do not matter for our country. I believe they do, especially over the long run. But stock prices over the long run are driven by the performance of the businesses they give you ownership in. And those businesses do a great job of adjusting their strategies and tactics to changes in the political landscape.
In the book Same as Ever, written by Morgan Housel, he recounts an interchange that with Warren Buffett and a friend of Morgans had in late 2009. His friend lamented to Buffett about the struggling economy and Buffett responded by asking him what the number one selling candy bar was in 1962 and then what it was in 2009. Both were Snickers. Morgan’s observation wasn’t about politics, but it may as well have been. The reality is whomever the President ends up being isn’t likely to have any impact on sales of Snickers. And as business owners, which is what owning stock ultimately is, all we care about are the things that impact the sales and profits of the businesses we own. In most cases, the next President will have little to no impact on our businesses and where the next President may have an impact, I trust that the managers of those businesses will adapt. We will be monitoring as well and make changes if needed. Regardless, history has taught us that investors that make portfolio changes based on politics do not typically fare well.
If you need some level of reassurance around election years, this Morningstar/Ibbotson data compiled by First Trust may be helpful:
Observations
There have been 24 Presidential elections since the S&P 500 Index began. In these election years:
- 20 of the 24 years (83%) provided positive performance
- When a Democrat was in office, as is the case now, and a Democrat was elected (or reelected), the total return for the year averaged 15.0%
- When a Democrat was in office and a Republican was elected, the total return for the year averaged 12.9%
Recall from the charts above, 77% of 12-month stock market returns have been positive and the historical performance of the stock market since 1970 has been 10.68% per year. So, Presidential election year returns have historically been more likely to have a positive return (83% of the time) than non-election years. And when the incumbent President is a Democrat, the average return was higher (15% or 12.9%) that year, regardless of which party wins, than non-Presidential election years. With that and $5, you can get a cup of coffee. Nevertheless, the historical data tells us Presidential election years and specifically, Presidential election years with a Democrat incumbent, are better than the average year.
Thank you for your continued trust and business. Your relationship means the world to us. Please don’t hesitate to reach out with any questions or needs you may have.
Authored by
Jason Hyrne, CFP®, CIMA®, CPWA®
Senior Private Wealth Advisor, Owner
PM-07172025-0558.1.1
