3 Market Trends to Watch in Q1
Exencial Wealth Advisors
Exencial is a leading independent wealth management firm providing leadership to our clients.
By Tim Courtney, Chief Investment Officer?
2023 was a year of dynamic shifts in the financial markets, characterized by interest rate hikes and pauses, inflation concerns and relief and significant market concentration in mega-cap stocks. As we look ahead to the first quarter of 2024, let's delve into these three pivotal areas and unpack what they mean for investors moving forward.
1. Interest rates. The market is salivating for interest rate cuts. Late last year, the stock and bond markets were betting that the Federal Reserve (Fed) would soon reverse course and start cutting. However, the market’s track record of predicting the Fed's moves and the course of inflation has been less than stellar over the last three years. Many investors are eager for a rate reduction because they grew accustomed to low rates during the pandemic. Given Fed Chair Jerome Powell’s dovish tone in December,1 lower interest rates seem closer than ever. And while the government and some investors will cheer if rates fall, it will ultimately be the wrong move for most citizens if inflation remains elevated.2
2. Inflation. Our initial forecast for 2023 was that inflation would decrease but stay above target, and that is roughly where we find ourselves today. Inflation eased last year with the most recent Consumer Price Index (CPI) reading at 3.1%.2 While there are factors working to pull prices lower, there are other forces countering them. For instance, people have been working less but demanding increased compensation.3 Unless productivity improves, this leads to lower production with increased demand, which is inflationary.4?
Inflation in 2023 was more service-oriented, and the evolving role of AI in addressing productivity gaps has been a significant theme that the market has been very optimistic about.5 We’ll be closely watching how inflation and productivity play out in the early months of this year, and generally AI’s role moving forward.
3. Market concentration. Last year, the market's growth was predominantly driven by mega-cap companies, leading to record levels of market concentration. Just seven stocks (Apple, Alphabet, Microsoft, Meta, Amazon, Tesla and Nvidia), referred to as “The Magnificent Seven”, made up 29% of the S&P 500’s market cap.6 These companies and others have garnered significant investor attention, but it’s important to recognize the headwinds facing these names.?
First, these stocks have become more expensive, some of them very expensive.7 Their hefty price tags can make future expected returns more challenging as the market and competition evolve. In addition, heightened regulatory scrutiny has become a clear risk. Until now regulation has benefited the mega caps as (1) they are generally in sectors with lower regulatory burdens than say energy/utilities, healthcare or finance, (2) their influence can tilt regulations to their benefit and (3) their size has provided capacity – their competitors often lack – to deal with the cost and complexity of regulation. Now, however, there is a growing push for antitrust measures and political pressure to reign in the mega-caps.8
领英推荐
As we move into 2024, we’ll be watching these themes with careful optimism and necessary discipline. If you have any questions, feel free to reach out to your Exencial advisor.
?
Sources:
?
PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE RETURNS.?Information and opinions provided herein reflect the views of the author as of the publication date of this article. Such views and opinions are subject to change at any point and without notice. Some of the information provided herein was obtained from third-party sources believed to be reliable but such information is not guaranteed to be accurate. In addition, the links provided within are for convenience only and the provision of the links does not imply any sponsorship, endorsement, or approval of any of the content. We do not guarantee the content or its accuracy and completeness. The content is being provided for informational purposes only, and nothing within is, or is intended to constitute, investment, tax, or legal advice or a recommendation to buy or sell any types of securities or investments. The author has not taken into account the investment objectives, financial situation, or particular needs of any individual investor. Any forward-looking statements or forecasts are based on assumptions only, and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. Any assumptions and projections displayed are estimates, hypothetical in nature, and meant to serve solely as a guideline. No investment decision should be made based solely on any information provided herein and the author is not responsible for the consequences of any decisions or actions taken as a result of information provided in this book. There is a risk of loss from an investment in securities, including the risk of total loss of principal, which an investor will need to be prepared to bear. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular investor’s financial situation or risk tolerance. Exencial Wealth Advisors, LLC (“EWA”) is an investment adviser registered with the Securities & Exchange Commission (SEC). However, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. EWA may only transact business in those states in which it is registered, notice filed, or qualifies for an exemption or exclusion from registration or notice filing requirements. Complete information about our services and fees is contained in our Form ADV Part 2A (Disclosure Brochure), a copy of which can be obtained at?www.adviserinfo.sec.gov ?or by calling us at 888-478-1971.
The S&P 500? is widely regarded as the best single gauge of large-cap U.S. equities. There is over USD 9.9 trillion indexed or benchmarked to the index, with indexed assets comprising approximately USD 3.4 trillion of this total. The index includes 500 leading companies and covers approximately 80% of available market capitalization.