Capital Markets Outlook 2024

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Investor fear was sky high a year ago. Then the market soared. What happened?

Early in 2023 we were beginning our recovery from a precipitous market decline, talk of runaway inflation and recession was a consistent theme, and a few mid-sized banks failed (though depositors were made whole, either through 100% FDIC coverage or by merging with another bank).

It was a scary time.

Fast-forward one year – the market soared and we are now back at all-time highs.

How could this be? A lot went right.

  • Inflation is dropping notably. Using the PCE measure, the last reading was 2.9%. This chart gives you a visual of what inflation today looks like relative to recent history.

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  • Many company CFOs played it safe in 2023, trying to balance company earnings expectations with broader talk of a looming recession. That recession hasn’t happened, and is looking less likely. Going forward, with the recent run up in many stocks, companies are remaining cautious on their earnings calls recognizing that valuations are once again high relative to history. What this signals is that, as a general rule, publicly-traded companies are not adopting an “everything is rosy” approach to their forecasts. That's OK. If everyone is saying that everything is great, that's when I would get concerned. 

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What these points have in common is that significant elements of risk in the market have dissipated in the eyes of investors. The negative sentiment present in early 2023 hasn’t been eliminated by any stretch, but it has lessened.

In addition to this turn, a novel element was introduced last year which gave investors reason to feel better about the future: AI.

AI as a technology is not new. But with the introduction of ChatGPT, this advanced technology gives us an insight into what is in store within the next 5+/- years. In short, an AI-enabled business promises to be more efficient in the coming years. More efficient companies, which are able to do more with less, promises to be quite profitable. Perhaps no company embodies the promise of AI more than Nvidia (ticker: NVDA). We’re at the very early stages of what AI can do, and NVDA is creating the infrastructure upon which AI applications are to be developed. NVDA grew 237% in 2023.

In addition, American consumers aren’t changing jobs. More job-changers means average incomes rise across the board (because workers typically change jobs for the promise of higher pay). Because workers are generally staying put with their employers, it also means their pay isn’t changing substantially. This means they have less extra disposable income to spend. Less, or the same, disposable income is a very important indicator of where the economy is headed. In other words, while we all hate inflation, it clearly is not so bad yet that workers are forced to take other, higher paying jobs to pay their bills yet. This outcome thus far fits neatly into the Federal Reserve's dual mandate - stable prices (i.e. keeping inflation low) and maximum stable employment. 

What does this mean for you as an investor? What should you do? Stay invested. Expect a pullback in markets, but do nothing when that happens. Expect hype out of news outlets trying to get investors flustered (i.e. more clicks) over the coming presidential election. Lots of political uncertainty heading into the rest of 2024. It won’t take too much to spook markets. But short term volatility should not phase you. Let’s sum it up –

Even without a significant bump in pay, the American consumer (which is the biggest driver by far of U.S. GDP) is in a strong financial position. The Fed is expected to cut rates in 2024. Lower yields will drive more investors back into stocks and out of money market funds and bonds. Current estimates are three rate cuts of 0.25% (0.75% total) in 2024. Public companies are well capitalized and growing. Inflation is down and set to stabilize at or below the 2% target. Banks are well capitalized. Unemployment remains at historic lows. Plus, there is a lot to like as we witness heavy investment into the next generation of technology in A.I. The research and development into AI today will help establish new, successful companies and drive efficiency into the existing firms that keep pace with the new tech.

Remain focused! Remain invested!

-Jonathan Cameron, CFP®

Photo by m. on Unsplash

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