By Arthur G. Swalley, CIMA®, Partner, Director of Investments
Markets closed 2023 with historically strong performance. US stocks mostly erased 2022’s losses. Bonds closed the year up on the back of a 5% rally in November and December but were unable to recoup 2022’s losses. The fall rally was touched off by Federal Reserve Chairman Jerome Powell saying that the Fed’s fight against inflation is effectively over and giving guidance to markets to expect the beginning of interest rate cuts next year. Mr. Powell did not say it explicitly, but the Fed should also enjoy the fact that its rising interest rate policy to contain inflation did not result in the widely anticipated recession of 2023.
Since most economists (anywhere from 80-100% in late 2022) were brutally wrong with their 2023 recession predictions, how should we develop an outlook for 2024? The yield curve is still inverted, the inflation rate is still above the Fed’s target, US fiscal deficits are still not under control, the national debt is still rising, and US politics are somehow even more polarized than ever. Add new Middle East conflicts and the ongoing Russia/Ukraine war to the mix, stir in the hottest year on record (fossil fuels), and come up with a target investment return. We wish all of the well-intentioned, highly-paid investment strategists and economists good luck!
Clearly, predicting anything about investments or the economy for 2024 appears to be where angels should fear to tread. What we think we know is that the Fed will continue to be data-dependent in making their decisions about the appropriate interest rate level. Their clearly stated goal is to return the long-term inflation rate to the 2% target while maintaining full employment. The short-term road to this outcome is historically volatile, so we feel safe in predicting that market results will be lumpy, not smooth – but when have market returns ever been smooth?
These predictions appear modest because we want them to have a high likelihood of being correct. As long-term investors, it’s far more important to get the big ideas right rather than constantly try to guess the next bounce of the market ball. Our big ideas are that capitalism is generally healthy, government policy continues to favor investment in corporations, and current interest rates for safe bonds provide returns on capital at levels not seen since 2007.
Warren Buffet is famous for observing that “In the short run, the market is a voting machine but in the long run, it is a weighing machine.” (Berkshire Hathaway investment letter, 1987) At any given moment in time, market prices are higher or lower than they should be based on the emotions of the “voters.” All the moments added together have provided significant long-term returns for patient investors – the “weighers.” Persistent creation of value is the result of businesses providing goods and services to customers in profitable ways over multiple business cycles, generating compounding returns to its owners. The “voters” in the markets cause short-term turmoil, providing the “weighers” with opportunities to capture long-term value.
In view and observance of this crucial election year, we predict that there will be many opportunities provided by the “voters” to make wise long-term investment decisions. We wish everyone a happy, healthy, and safe 2024!