5 considerations for investors in 2024

1. Inflation will likely settle. You should still hedge against it.

Across the developed world, headline inflation has collapsed from a peak of almost 8% to under 3.5% today. That’s a lot of progress.

*** There are still many inflationary factors that have yet to be address like productivity, lack of innovation, scaling back of capital spending, skills gap, and the cost of implementing ESG.

2. The cash conundrum: The benefits and risks of holding too much

At a 5% yield, cash can’t be ignored. But, it doesn’t tend to work best in the environment we see moving forward. Cash works pretty well when central banks have to hike more than expected and when inflation expectations are moving higher – as we saw over the last two years. But today, few are still debating whether the Federal Reserve will hike another time. The focus, rather, has decidedly shifted to when – and by how much – the Fed will cut next year.

Consider this, especially as we head into next week’s Fed meeting: The market is pricing in a 60% chance of the Fed cutting by March…and a 100% chance that it does so by May. In all, investors think we’ll see 125 basis points worth of cuts by December.

Mortgage defaults could be on rise due to high level of household debt.

3. Bonds are more competitive with stocks. Adjust the mix according to your ambitions

Bonds are back. November was the best month for U.S. core fixed income in 40 years.

Bonds provide stability in portfolios with lower volatility versus stocks, coupon payments generate income and prices rise when economic growth slows and interest rates fall. That security came at a big cost over the last decade. Back before the pandemic, a quarter of all government debt across the globe carried a negative yield. Now, negative yielding debt has all but evaporated and only exists in Japan (and even there, the Bank of Japan signaled this week it may exit its era of negative interest rate policy at its meeting later this month). Today, almost 60% of global government debt now offers yields in excess of 3%.

4. With AI momentum, equities seem to be on the march to new highs

While the S&P 500 is up over 20% so far this year, we wouldn’t rule out a good ol’ Santa Claus rally to finish off 2023. December has been positive in 21 out of the last 29 years.

Fun aside, today’s environment tends to mark a sweet spot for stocks. Inflation that’s between 2% and 3% has historically shown the strongest average returns for the S&P 500. Earnings growth is accelerating again after the majority of sectors already went through corrections over the last year. We don’t think consensus is too optimistic, and we also think the power of AI is real. While much of the focus to date has been on how tech-oriented companies can benefit (just this week, Google announced its own AI model, Gemini, to compete with

Open AI’s ChatGPT), firms across a broad array of industries (ours included) are making big AI investments.

5. Pockets of credit stress loom, but they will likely be limited

An inescapable fact of the business cycle is that higher interest rates make credit harder to come by. We expect the coming year to see more stress in certain sectors of the credit complex.

For instance, there is approximately $4.5 trillion in outstanding commercial real estate debt (about half of it floating rate), with about $2 trillion of it due to mature in 2025. The office sector, representing about 14% of commercial real estate, has been impacted by the lingering popularity of “work from home” post-pandemic. Elsewhere, default rates for U.S. high yield bonds and loans are also rising.?

Ultimately, though, we think these problems will be contained. We do not see tighter credit conditions leading to a full-blown credit crunch. The combination of strong household and corporate cash flows and a more benign inflation environment should allow central banks to lower interest rates before these pockets of credit stress do serious damage to portfolios.

Amazing work by J.P. 摩根 摩根大通

Source - https://www.jpmorgan.com/insights/outlook/market-outlook/five-considerations-for-investors-in-2024

Blog – Stock Market Analysis and Commentary for WE December 8 2023 - https://www.dhirubhai.net/pulse/stock-market-analysis-commentary-we-december-8-2023-paul-young-lgtwc/

Paul Young CPA CGA

Senior Data and AI Thought Leader - Financial Planning, Analysis, and Reporting

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Paul Young is a former IBM Senior Customer Success Manager that has deployed over 300 data and AI solutions across industries and geographies for the past 8 years. Paul is also SME on how best to ingest data to drive better business outcomes across industries and geographies.

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