The Year of Soft Landing(s)

Happy New Year to everyone, we’re looking forward to joining you in what already is shaping up to be another absolutely fascinating year.

The most pressing question for me right now is – how much of what investors should expect in 2024, was already delivered to them in 2023? For example, will the artificial intelligence (AI) tailwind we saw last year continue to blow this year, or even for the rest of the decade? Can the market live up to its currently heady valuations? And what does Fed policy, and the path of interest rates, mean for other companies, and for fixed income?

Look, I am still very comfortable with our forecast for the S&P 500 for this year, of around 4,700, give or take 5% in either direction. There’s no doubt we had a nice Santa rally, but the market is taking a breather now, and, I think, focusing a bit more sharply on the risk/reward tradeoff. Of course, there’s a nice investing rule of thumb that “as January goes, so goes the year,” so perhaps recent price action is a good indicator of what the year has in store. Now, I think 2024 could be a relatively benign year if the economy can deliver the soft landing that the market is assuming, but, let’s not forget, it’s not just one soft landing. We have to navigate at least three others – the U.S. elections, fiscal policy, and geopolitics. It’s a lot to get right.

I would characterize 2023 as a year of the “micro-market” when it was the tech story and the AI revolution that led. This year, I believe, will be a “macro-market” when the larger economy must cash the check that the micro expectations have written. We would need to see superb earning growth from tech, in the order of 20% or so, this year and next to justify valuations, and, while I am still positive on the sector, those valuations really are demanding. I expect a pullback, and am actually more worried about the stock market than the economy – “valuation” may be a more troubling word to me than “recession”! 

So how to play the year?

Well, first of all, I think a cut from the Fed in March is pretty much out of the question. There’s no real sign of a recession yet, and so our house view remains a first cut in June at the earliest. There’s no real slack in the economy to speak of, and I just don’t see any rush to cut, or any need to be aggressive. In fact, I’d expect only 2-3 cuts over the course of the year.

In terms of sectors, we’ve seen quite a rally in some of the big banks and big pharma, but I am still relatively positive on those names – even though I expect financials to have flat, to slightly negative, profits this year, they remain undervalued. I am pretty positive on small caps, I think investors should give some thought to slowly building those positions, they are nice diversifiers, and could have several good years ahead. There are aspects in them that I don’t like, such as the weighting to some of the smaller banks, and to real estate investment trusts (REIT), but it could be a good year for small cap growth. Outside the U.S., I still like Japan, but Europe I fear has too much exposure to China and the Middle East, so hold it for diversification, but don’t expect too much from these economies. In fixed income, I still maintain that a 5-6% yield on corporate bonds is a pretty attractive alternative. 

U.S. elections

Finally, let me share just a few thoughts on the election. If Trump wins the election, Trump 2.0 would be a very different proposition to Trump 1.0 in my view. The first time around we saw some benign disruption to tax and regulation. This time I think it could just be a repeat of the former trade policy. But, if it comes down to Biden vs. Trump, will the electorate go with Biden? Is there more chance of a Democratic sweep with Trump as the nominee?

Of course, election years typically aren’t great for markets. So what could be a sweet spot? Will we get another Republican candidate that emerges and revitalizes the debate? Or can we navigate a Democratic president, and a Republican Congress, which has not been a bad combination for markets historically?

Whatever the outcome, here's to a successful 2024, our resolution is to help you through it!

 

– David