2024 Annual Market Update

2024 Annual Market Update

January 24, 2024

I hope this message finds everyone well and enjoying the start of 2024. This letter serves as a brief recap of 2023 and offers my insights for the year ahead. While there is much to consider, my aim is to provide a concise and clear overview of my current market perspective.

2023 proved to be a remarkable year for the stock market, surpassing expectations with its double-digit returns as inflation and a recession loomed on everyone’s mind. Despite these widespread concerns, I maintained an optimistic stance and positioned our strategies accordingly. This success hinged on balancing short-term awareness with a long-term vision. We believe that our participation in the significant rally positions us favorably for 2024. A key takeaway from last year is the realization that markets and the economy don't always correlate. It's crucial to remember that the market is forward-looking, often reacting not to present conditions but to anticipated future trends. While it's important for us to look at the short term possibilities it’s more important to understand the long term direction of the market’s secular trend. Maintaining balance in recognizing negative and positive news can be difficult in today’s 24-hour news cycle. Inflation and recession led the media conversations, along with higher for longer Fed monetary policy. This caused increased fear among investors leading to a significant reallocation to money market funds. The higher yields in those money market funds made the decision to sell stocks much easier. Dissecting the Consumer Price Index (CPI) led us to see that many of the components that kept inflation higher were lagging indicators. We could see that the direction of those lagging indicators were down, meaning inflation should be moving lower. Entrance of AI also played into the thesis of inflation falling over time. Technology is very deflationary and the disruption by AI should be significant. Historical patterns have shown that markets typically decline ahead of a recession and start recovering months before its conclusion. Considering this, the downturn in 2022 might have been the market's anticipation of a recession, with the current recovery phase already underway. From experience, I believe it's vital to engage actively in the initial stages of market recovery. I am happy with the results but what can we expect in 2024?

As 2024 begins, my research uncovers a variety of perspectives. People are currently more bullish as shown in the AAII Sentiment Index (https://www.aaii.com/sentimentsurvey). The stock market’s strong performance since October of 2023 aligns with this survey. People feel optimistic when the market moves up and vice versa. This does, at times, give us indication of too much optimism or pessimism in the markets and a possible turning point. An example would be October 2022 where this sentiment survey was very bearish right before the market bottomed. It’s critical to pair this sentiment survey with other data to see if there is a possibility of an inflection point in a short run, and determine if it's worthwhile to make drastic adjustments. In 2022 the sentiment was very low but forward-looking data seemed to be improving. At that point, increasing risk made sense. Currently, while sentiment is slightly above average, I don't foresee significant negative data suggesting a major downturn. From the technical perspective markets are slightly extended so a drawdown in the next few months is not out of the question, but nevertheless, this is how markets move. For example, in a bull market, there is a market rally followed by a consolidation period and a further move up. Timing those short term movements is almost impossible as reversals can happen at any moment and are aggressive. (You can see situations that move quickly, such as a 7% pullback followed by a fast 10% move up and then another 10% or so pullback and up again.) In these markets it’s important to try to be right directionally and accept the volatility.

While the current environment can be viewed negatively from various angles, it’s crucial to note the Federal Reserve’s shift towards reducing interest rates. Amidst significant noise, the focus should be on falling interest rates which are likely to drive market trends. I do expect the Fed to cut but timing is the challenging aspect. That “unknown” could make the first half of the year volatile as you will have non stop media coverage of that topic, which is likely to create fear. Once the Fed starts cutting (which could be as early as March), investors will have more clarity which is why I think most of the gains could come in the second half of the year.

As long-term investors we focus on the long-term trends, but understanding current conditions helps us reposition for future opportunities. It’s important to stick to that thesis and view volatility as just that: short term volatility that always happens in markets.

Given the information and trends I’ve seen, I am anticipating a positive year. LPL Research anticipates a range between 4,850 and 4,950 for the S&P 500 but I'm optimistic we could surpass that. There are positive seasonal factors to consider as well. Presidential election years typically favor the markets, often starting with volatility and pulling back around March (as displayed in the chart below) – a pattern that seems plausible for 2024. This perspective aligns with the current year considering the drop in rates that contributed to the markets move up over the last few months. After such a move it makes sense for some consolidation. Currently rates are moving up (counter trend bounce) causing the market to fall. Technically this is normal. The market is very sensitive to interest rates. With current uncertainty, interest rates could continue to move up and down causing volatility in the market (so a 7%+ pullback wouldn’t surprise me.) If this does occur it could present great buying opportunities for long money as easing conditions should follow.

As shown in the chart below, historically, markets rally into the election followed by a pullback and a continuation after the election. At this point people are just happy that the election process is over and markets end up following the broader trend up.

  

https://seekingalpha.com/article/3989751-2016-presidential-election-and-stock-market-cycles

As mentioned earlier, there is a lot of money on the sidelines that has not participated in the 2023 rally. A pullback could be an opportunity for that money to reenter the markets, especially when the yields on those money market funds start to fall. Monetary easing should also occur favoring risk on assets.

   

https://fred.stlouisfed.org/series/MMMFFAQ027S#

While these are some of the factors under consideration, my approach remains adaptable. Short-term views may evolve, necessitating strategic adjustments, but the current outlook is cautiously optimistic. Despite the recent CPI spike, influenced partly by car insurance rates, I view this as a temporary deviation from the overall downward trend. The used car market, a significant factor last year, is showing signs of decline (see chart below), suggesting that car insurance rates, a lagging indicator, should follow suit.

https://site.manheim.com/en/services/consulting/used-vehicle-value-index.html

Since beginning my investment career in 2005, I've learned the importance of long term engagement in the market, while staying attuned to short term movements to capitalize on long term opportunities. As always, I remain committed to navigating these complexities to help turn fears into opportunities.

As I conclude, I’d like to remind our esteemed readers that the economic forecasts and strategies discussed herein are based on current market trends and analyses. While we strive for accuracy and relevancy, it's important to acknowledge that these forecasts may not unfold as predicted, and there can be no absolute guarantee of the success of the strategies promoted. At Rock Martin Private Wealth Management, we are committed to providing high-quality, holistic financial planning and investment management, tailored to the unique needs of each individual client. We believe in transparency and informed decision-making, and encourage our clients to consider all factors in their financial journey.

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