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January Monthly Market Letter

January Monthly Market Letter

January 23, 2024

January 23, 2024

January Market Letter

Dear Great Lakes Clients, Families & Friends:



A choir of optimistic investor sentiment closed 2023 on a high note, as expectations of “steep cuts to interest rates” may be at odds with the Federal Reserve’s (Fed’s) actual sheet music. Considering the tumult of the year as sentiment focused on economic and inflation data, this discordance isn’t all that surprising and could signal volatility to come, but in the meantime, the market environment looks a lot brighter at the tail end of 2023 than it did at the close of a dreary 2022.

While the Dow Jones Industrial Average notched seven record highs in 2023, the S&P 500 closed the year less than 1% from all-time highs. Tech-related sectors were the best performers for the year, as the NASDAQ 100 and its leading artificial intelligence stocks saw their best year since the 1999 tech bubble. And small-cap equities, which had been a significant underperformer for the year, showed signs of a resurgence as they were the best performer in the fourth quarter.

Still, it may be too soon to celebrate the Fed engineering a “soft landing” – a return to the target inflation rate without a recession. For one, inflation remains above the 2.0% target. Two, the lagging effects of the Fed’s rate hike program continue to cool economic activity. And three, the repercussions of higher economic growth or any other geopolitical event with the potential to disrupt food and energy prices could directly influence inflation and shape future Fed policy.

But even a conservative reading of the Fed’s messaging suggests interest rate cuts to come through 2024. That said, the Fed has demonstrated its commitment to calming inflationary pressures, and it appears they are turning their attention to the economy where there are more and more signs of slowing.

Before we continue, let’s take a final look at 2023 by the numbers.

Composite index points to recession 

The Leading Economic Index, a composite index from The Conference Board that seeks to forecast turning points in the business cycle, declined for its 20th consecutive month in November, weakening further than expected. The Conference Board said it expects a “short and shallow recession in the first half of 2024.”  

Movement suggests broadening equity market growth 

To a significant degree, the incredible performance of a small formation of high-flying, mega-cap tech stocks propped up headline equity indices through 2023, providing a sense of a stronger market than experienced by a more diversified position. The average stock, by comparison, has been in a two-year bear market. Recent activity since the start of the October rally suggests positive movement below the surface, meaning 2024 could bring more opportunity for those stocks left behind. December saw 10 of the 11 sectors finish in the green, with interest-rate sensitive sectors leading the way.  

Treasury yields lowered as sentiment improves 

Fixed income prices soared, continuing to demonstrate the strength of the market through December. Reflecting improving expectations, the yield on the 5-year Treasury ended November at 4.27% and closed December at 3.85%. The 10-year yield declined from 4.33% to 3.88%. The year’s high interest rates allowed investors an opportunity to lock in elevated income levels while the year-ending price strength provided those participants with positive total returns. 

Waning OPEC+ vigilance brings oil prices down 

Production discipline among the OPEC+ group, amid a return to pre-COVID demand, has been slipping, bringing oil prices to near 2023 lows in December. Particularly, Saudi Arabia and Russia have expressed displeasure at smaller OPEC members that are flagrantly producing beyond their quota levels, cheating the cartel, in effect. 

European central banks yet to message lowering rates 

Like the U.S.’s Fed, the European Central Bank and Bank of England held monetary conditions steady through December as economic activity continues to slow. Meanwhile, large-cap equities – particularly German stocks – dashed upward to close the year with strength, as the Eurostoxx 600, a composite index of 600 European stocks, hit 23-month highs. Unlike the Fed, the British and European monetary authorities have not signaled the lowering of interest rates. Investor sentiment has swung toward a growth outlook, but fears that higher-for-longer rates could unnecessarily deepen and lengthen a recession could cause investor sentiment to rapidly reverse.

U.S. and China resume military-to-military talks 

An agreement to resume military-to-military communication secured in November at the meeting of President Joe Biden and President Xi Jinping came to fruition in December, ending a 17-month communications impasse between the two world powers’ armed forces. This is generally seen as supporting stability, as military-to-military communications can act as a critical avenue for addressing miscommunications and flare-ups around key geopolitical flashpoints, such as in the Taiwan Strait and South China Sea. 

The bottom line

  • By the end of 2024, we expect the outlook for economic growth to improve.
  • We expect U.S. equities to be volatile in the short-term, but to be positive in 2024.
  • We believe that interest rates have peaked and may fall some in 2024.
  • Cash is king and Bonds are back. We would add traditional fixed income, particularly money markets and short-dated bonds, for safety and stability in 2024.
  • We recommend investors to continue to consider an overweight of alternative investments, including private equity and debt.
  • Gold has broken through $2,000. We expect to see continued higher prices, back above $2,300 per ounce, in 2024.
  • Depending on your timeframe, current investment strategies should be based on what’s happening “Now,” “Next,” and “Later.”
  • We currently have a “Buy” on 10 of our 12 strategies. Which strategy is right for you? That just depends on your risk tolerance, ultimate objective, etc. We are happy to discuss this with you.
  • Our current approach continues to be discipline and patience when both buying and selling. Volatility will continue to create opportunities for 2024.

At this time last year, no one could have predicted the highs and lows that would follow – the incredible first two quarters, the midsummer reversal, then the even more remarkable end-of-year rally. We start 2024 in a much stronger position, owing to the progress made on inflation, and that’s heartening – strength often begets strength. However, sluggish economic growth and the potential for investor sentiment to suddenly shift are potential risks, as is the potential of a recession. That’s worth remembering, even when the forecast is clear.  

Together, we will help you navigate whatever 2024 brings, remaining disciplined in the faces of both exuberance and frustration, and always keeping our eyes on your goals. 

Thank you for your continued trust in us and our commitment to your well-being. We wish you good health and tidings and a happy new year. 

If you have any questions about your portfolio, we look forward to discussing them with you on our next scheduled call or meeting.

Sincerely,

Your Investment Team at Great Lakes Wealth