Wealth Matters Newsletter - January 2024

Thoughts On The Year Ahead

Written by: Mark P. Bernier, CFA, Senior Vice President/Wealth Management Officer

The markets and economy surprised many investors and analysts last year.  The recession that many anticipated (us included) never materialized, despite the most aggressive monetary policy action by the Federal Reserve in over forty years.  Consumers continued to spend, the labor market remained resilient, and equity markets exhibited strong returns.  Several factors in the year ahead are likely to provide investors plenty to consider after such a remarkable year.

Earnings
A company’s stock price reflects investors’ estimates of future company earnings.  In the first half of 2023, corporate earnings (as measured by S&P 500 companies) fell from the prior year, and estimates for fourth quarter earnings, according to a recent report published by FactSet Research Systems Inc., are only expected to increase 1.3% over the prior year.  Yet in 2023, the S&P 500 generated a 26.29% total return!  The reason: multiple expansion.  At the end of 2023, the forward P/E ratio of the S&P 500 stood at 19.2, which was above the 5-year average (18.9) and 10-year average (17.6).  In other words, investors were willing to pay more for stocks in 2023 relative to their earnings than at any other time over the last decade, on average.  However, many of these statistics are being skewed by the fact that the S&P 500 has become very “top heavy”, meaning a small handful of companies are having an outsized impact on market returns and overall earnings estimates for the index in total.  Consider the charts below from J.P. Morgan Asset Management. 

​The risk to S&P 500 earnings in 2024, and thus return potential, is that earnings from those top ten companies do not live up to what may be considered lofty expectations. 

Monetary Policy 
The Federal Reserve’s Federal Open Market Committee (FOMC) last raised the Fed Funds target rate at its July meeting, as various measures of inflation have continued to show signs of subsiding.  Investors and analysts have been optimistic that the Fed was finished with this rate hike cycle since the fall, as exhibited by the rally in both stock and bond markets during the fourth quarter of 2023.  In addition, the Fed’s Dot Plot released after its December meeting (which represents FOMC members forecasts for interest rates in the future), indicated that its own members anticipate the potential for three 0.25% rate cuts in 2024.  Interest rate cuts would certainly be a welcomed change for investors (perhaps not so much for savers), but timing and magnitude of those decisions is very much dependent on the inflation data reviewed by the FOMC.  The minutes from the December FOMC meeting highlighted the uncertainty amongst the members regarding the circumstances and timing of any rate cut decisions.

Consumer
Consumption represents nearly 70% of U.S. economic output and while consumers continued to spend, it was likely at a slightly slower pace than the 2.5% spending growth in 2022.  Consumer spending has been driven by resilient employment markets, improving incomes, and generally good financial health.  One area of potential concern is the amount of credit card debt consumers are carrying and the uptick in credit card delinquencies.  The latest quarterly report from the Federal Reserve Bank of New York showed credit card balances at over $1.08 trillion, an all time high.  See the chart below from the St. Louis Fed noting the increase in credit card delinquencies.  What will be important to watch in the months ahead is whether or not this uptick in delinquencies is a reversion to trend from very low delinquency rates over the last few years, or if this is signaling a more challenging environment for consumers.

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Geopolitics
Presidential election years often spur conversations about volatility and market performance, as investors and analysts attempt to predict and quantify the impact of the results.  From a historical standpoint, there have been 24 U.S. Presidential elections since 1928 and the S&P 500 has provided positive performance in 20 of those 24 election years.  While past performance is no guarantee of future performance, the data is at least intriguing.  This election year is certainly unique, and if nothing else, provides investors and analysts with plenty of “what if” scenarios to entertain. 

There are plenty of other geopolitical risks to assess that may have more immediate market implications.  The ongoing war in Ukraine, the Israel-Hamas war, increased tensions throughout the middle east, and North Korea’s recent rhetoric and missile launches all have the potential to increase volatility in markets.  Should we see escalation in any of these areas, a flight to safe-haven assets would be expected.  

2024 has the potential to present investors with a variety of factors and outcomes to consider.  The most important consideration for investors is to remain focused on their long-term goals; short-term volatility in markets should be an expectation.  We look forward to working with you no matter what the new year might have in store.