Topic: Market Movement

Stocks have picked up right where we left off at the end of 2023. Last week, the S&P 500 officially closed above 5,000 for the first time — and in a little less than three years, the S&P has gained more than 1,000 points.

The chart below looks at where stocks traded one month, three months, six months and one year after each of the major milestones for the S&P 500. On average, stocks are up 8.6% one year after these major milestones.

5,000 Is Here, Now What?

S&P 500 returns after major milestones

Just a year ago, investors were being bombarded with talk of an imminent recession. We now have a healthy economy with inflation well off highs from 2022, a Federal Reserve bank indicating rate cuts are likely to occur in 2024, improving productivity and stocks at all-time highs. 

Stocks have rallied over 22% during the past 4 months. The S&P 500 finished higher 14 of the last 15 weeks – something that hasn’t happened since 1972. A downturn would be perfectly normal following this rally.

The chart below shows that higher prices may remain likely. When stocks have been up more than 5% in the month of February, the market has been higher more than 70% of the time at year end — for an average gain of over 9%.

A Good Start to 2024 Could Mean the Bull Continues

S&P 500 performance when >5% YTD return in February

1. Super Bowl Indicator: First introduced in 1978, this indicator suggests that a win by a team from the NFC meant the stock market would probably go up that year. For more than 30 years, the indicator had an impressive success rate of 95%. In the years when the AFC team has won, the S&P has earned an average return of 8.2%. When the NFC team has won, the average return has been an impressive 9.7%. Both are favorable sets of returns. More recently, the indicator has had a less-convincing track record, including the last two times the Chiefs have won.

2. The January Barometer: As January goes, so goes the year. As we wrote recently, it is true that January has more consistently indicated the direction of the stock market than any other month. Since 1969, when stocks posted a gain in January, the market ended higher 70% of the time. As a reminder, the market finished higher in January this year.

3. First Five Days: This indicator says that the direction of the market during the first five days of January determines whether the market will be up or down for the whole year. Over the past 44 years, full-year gain followed 19 of the 24 times that the market finished higher. However, the market has posted a gain of more than 70% of the time, no matter what the market did the first five days — and a market decline during the first five days has been a predictor only 25% of the time.

4. Consumer Price Index: This week, the Consumer Price Index for January came in hotter than expected, as CPI rose .3% over December. On an annual basis, CPI was up 3.1%, well above the Fed’s target of 2%. Policymakers are watching closely to ensure it continues to trend to the 2% target, and both the stock and bond market react accordingly. As seen on Tuesday, inflation (as reported by CPI) can affect the market in the short term. Time will tell if Tuesday’s selloff was an overreaction to one inflation report or the start of a trend.

5. Yield Curve: The government bond market tends to signal a global recession when short-term bond yields rise above long-term yields. In 2023, the Group of Seven countries (Canada, France, Germany, Italy, Japan, the United Kingdom and the United States) all had inverted yield curves. Only one country, the United States, has avoided recession and negative GDP growth for one quarter last year. A return to a more normal yield curve may signal a better outlook for these countries. An inverted yield curve has been a strong recessionary indicator in the past. Every recession has been preceded by an inverted yield curve, but not every inverted yield curve has led to a recession.

6. Equal Weighted Index: Most stock market indexes are capital weighted. Market capitalization is stock price times number of shares outstanding. The larger the market capitalization, the larger the weighting for most indexes, and the bigger the impact on market performance. Equal-weighted index has each stock at the same weighting, providing a measure of what the average stock is doing rather than a handful of the largest ones, known as the Magnificent Seven. In general, the greater the number of stocks pushing the market higher, referred to as market breadth, the more support the market has. The last 14+ months have seen very little breadth to the market gains.

No one indicator or past statistical support provides a guarantee of future performance. Sometimes, people look for causation and not correlation. The popularity of certain indicators for investment decisions is a testament to the desire for an easy answer on how to invest in complex markets.

The CD Wealth Formula

We help our clients reach and maintain financial stability by following a specific plan, catered to each client. 

Our focus remains on long-term investing with a strategic allocation while maintaining a tactical approach. Our decisions to make changes are calculated and well thought out, looking at where we see the economy is heading. We are not guessing or market timing. We are anticipating and moving to those areas of strength in the economy — and in the stock market. 

We will continue to focus on the fact that what really matters right now is time in the market, not out of the market. That means staying the course and continuing to invest, even when the markets dip, to take advantage of potential market upturns. We continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, while not making investment decisions based on where we have been.

It is important to focus on the long-term goal, not on one specific data point or indicator. Long-term fundamentals are what matter. In markets and moments like these, it is essential to stick to the financial plan. Investing is about following a disciplined process over time.

Sources: Carson, Kestra Investment Management, Schwab

This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS) an affiliate of Kestra IS. CD Wealth Management and Bluespring Wealth Partners LLC* are affiliates of Kestra IS and Kestra AS.  Investor Disclosures: https://bit.ly/KF-Disclosures

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

Fidelity Investments and Fidelity Institutional® (together “Fidelity”) is an independent company, unaffiliated with Kestra Financial or CD Wealth Management. Fidelity is a service provider to both. There is no form of legal partnership, agency affiliation, or similar relationship between your financial advisor and Fidelity, nor is such a relationship created or implied by the information herein. Fidelity has not been involved with the preparation of the content supplied by CD Wealth Management and does not guarantee, or assume any responsibility for, its content. Fidelity Investments is a registered service mark of FMR LLC. Fidelity Institutional provides clearing, custody, or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC, Members NYSE, SIPC.

Stocks continued to move higher throughout January, as the S&P 500 has been positive 12 out of the last 13 weeks. The question is, does a good January mean much for the rest of the year?

It turns out that the “January Barometer” could be a good sign for investors. Historically, when the first month of the year is positive, the rest of the year is higher 86% of the time — up nearly 12% on average. When the first month of the year is lower, the market is higher 60% of the time — up only about 2% on average. Overall, a strong January is potentially a good sign.

So Goes January, Goes the Year

The January Barometer says a strong January for stocks is a good sign

People tend to assume that higher rates are bad for stocks and lower rates are good. What we have seen since the beginning of 2023 is that markets have been strong not because of rates going up or down, but because the economy has been strong.

The assumption was that higher rates would force us into a recession, which would have been bad for corporate earnings, which ultimately is what the market cares about. Instead, we have seen stronger-than-expected earnings in many different companies and sectors, not just technology.

Market analysts continue to expect double-digit earnings growth in 2024. With rates as high as they are today, the assumption is that they will go back down soon. Some economists are aggressively calling for and predicting rate cuts this year.

The risk to the market remains that rates stay higher for longer. The Fed will need to continue to tread cautiously as it battles the possibility of lowering interest rates, but not at the expense of inflation rearing its ugly head again and repeating the mistakes of the 1980s.

Interest Rate Hikes Haven’t Necessarily Been Bad for Stocks

U.S. consumers have weathered the higher interest rate environment quite well. This has a lot to do with the fact that the debt profile of households with significant leverage is comprised of lower-rate, longer-term mortgage balances, compared to higher-rate, shorter-term credit card balances. Household incomes remain strong, especially with inflation easing. This continues to drive consumer consumption.

If you expect inflation to continue to ease, that means real income remains strong. Consumer spending has accelerated as we have seen real income growth from tight labor markets, ongoing spending from excess savings and rising household net worth.

Consumer Financial Obligations and Household Mortgage Debt Service

Each has risen since the 2021 lows, but are still low historically

Now that the market is back to all-time highs, what happens next? The economy continues to roll along. GDP expanded at an annual rate of 3.3%, adjusting for inflation. The economy continues to be underestimated.

It is very difficult to be in a recession with low unemployment, strong GDP, double-digit earnings growth and inflation easing. This does not mean that we don’t expect bumps in the road ahead during 2024. We still have plenty of uncertainty: market domination by a select few stocks, conflict in the Middle East and Ukraine and lofty valuations, not to mention a presidential election in November.

The CD Wealth Formula

We help our clients reach and maintain financial stability by following a specific plan, catered to each client. 

Our focus remains on long-term investing with a strategic allocation while maintaining a tactical approach. Our decisions to make changes are calculated and well thought out, looking at where we see the economy is heading. We are not guessing or market timing. We are anticipating and moving to those areas of strength in the economy — and in the stock market. 

We will continue to focus on the fact that what really matters right now is time in the market, not out of the market. That means staying the course and continuing to invest, even when the markets dip, to take advantage of potential market upturns. We continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, while not making investment decisions based on where we have been.

It is important to focus on the long-term goal, not on one specific data point or indicator. Long-term fundamentals are what matter. In markets and moments like these, it is essential to stick to the financial plan. Investing is about following a disciplined process over time.

Sources: Capital Group, Carson, FactSet, Fidelity, KIM, Schwab

This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS) an affiliate of Kestra IS. CD Wealth Management and Bluespring Wealth Partners LLC* are affiliates of Kestra IS and Kestra AS.  Investor Disclosures: https://bit.ly/KF-Disclosures

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

Fidelity Investments and Fidelity Institutional® (together “Fidelity”) is an independent company, unaffiliated with Kestra Financial or CD Wealth Management. Fidelity is a service provider to both. There is no form of legal partnership, agency affiliation, or similar relationship between your financial advisor and Fidelity, nor is such a relationship created or implied by the information herein. Fidelity has not been involved with the preparation of the content supplied by CD Wealth Management and does not guarantee, or assume any responsibility for, its content. Fidelity Investments is a registered service mark of FMR LLC. Fidelity Institutional provides clearing, custody, or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC, Members NYSE, SIPC.

It took a little more than two years, but the S&P 500 closed at a new all-time high on Friday. The previous high, set in early January 2022, preceded a sharp drop in the market that was sparked by war in the Ukraine, supply-chain challenges from the pandemic and a spike in inflation not seen since the 1980s.

The bear market ended in October 2022, and since then, stocks have recovered from the 25% drop — despite many economists and Wall Street analysts predicting that a weakening economy, tapped-out consumers and higher rates would keep stocks from moving higher.

S&P 500 Hits Record 4,839.8 Close

Recent milestone closes since January 2020

The S&P 500 has set more than 1,000 new highs since 1957 — meaning a record high was set on 7.1% of all trading days. In our opinion, stocks trading at all-time highs is perfectly normal and should not be viewed as a warning sign.

It is more unusual to go a year without a record high — like we did in 2023 — which has happened just 13 times. After setting a new high, returns were better than average 12 of those 13 times, with an average return of more than 11% in those 12 instances.

Don’t Fear New Highs

S&P 500 performance after a new all-time high and more than a year without making one

The Magnificent Seven stocks – Alphabet, Amazon, Google, Meta, Microsoft, Nvidia and Tesla – have been a big reason for the market rise over the last 12-plus months. At year end, those seven stocks had a market capitalization (value) of about $12 trillion. To get to the S&P’s next $12 trillion in market capitalization, you need to look at 42 companies to find similar value.

The S&P 500 Index has a forward P/E (price to earnings ratio) of less than 16 when you exclude the Magnificent Seven stocks. That is not expensive from a historical perspective. Earnings growth estimates for the Magnificent Seven remain strong, as analysts are expecting more than 20% for those seven stocks and more than 11% for the S&P 500 as a whole.

Long-term estimates for the Magnificent Seven remain high, but these stocks come with increased volatility. Risks to the group include elevated expectations as well as potential global weakness and heightened regulations in several of the companies. This is a good reminder to maintain diversification around the Magnificent Seven.

Can the Magnificent Seven Maintain Their Dominance?

Stocks of the S&P 500 (USD billions)

We believe a good source of diversification in 2024 will be the fixed-income market. Both stocks and bonds had a terrible year in 2022, and diversification was thrown out the window that year. For most of last year, bonds continued to struggle. It was not until the fourth quarter — when the Fed started hinting about the end of the rate-hiking cycle and potential rate cuts in 2024 — that bonds rebounded and ended the year in the positive.

The current level of money market funds is more than $6 trillion, almost double the average from 2011 to 2017. We anticipate that as the Fed provides a clearer signal for interest-rate cuts, monies will flow out of shorter-duration bonds and money market and into longer-dated bonds.

As a reminder, when interest rates fall, bond prices increase, providing a boost to bond returns. This is the main reason that bonds should be a stabilizer in 2024, as it is widely expected that the Fed will begin to reduce interest rates at some point this year. There is no hard and fast rule that says that money from money market funds must flow into equities. Those funds may flow into stocks and bonds, helping both asset classes potentially have a strong 2024.

The CD Wealth Formula

We help our clients reach and maintain financial stability by following a specific plan, catered to each client. 

Our focus remains on long-term investing with a strategic allocation while maintaining a tactical approach. Our decisions to make changes are calculated and well thought out, looking at where we see the economy is heading. We are not guessing or market timing. We are anticipating and moving to those areas of strength in the economy — and in the stock market. 

We will continue to focus on the fact that what really matters right now is time in the market, not out of the market. That means staying the course and continuing to invest, even when the markets dip, to take advantage of potential market upturns. We continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, while not making investment decisions based on where we have been.

It is important to focus on the long-term goal, not on one specific data point or indicator. Long-term fundamentals are what matter. In markets and moments like these, it is essential to stick to the financial plan. Investing is about following a disciplined process over time.

Sources: Carson, CNBC, FactSet, Capital Group

This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS) an affiliate of Kestra IS. CD Wealth Management and Bluespring Wealth Partners LLC* are affiliates of Kestra IS and Kestra AS.  Investor Disclosures: https://bit.ly/KF-Disclosures

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

Fidelity Investments and Fidelity Institutional® (together “Fidelity”) is an independent company, unaffiliated with Kestra Financial or CD Wealth Management. Fidelity is a service provider to both. There is no form of legal partnership, agency affiliation, or similar relationship between your financial advisor and Fidelity, nor is such a relationship created or implied by the information herein. Fidelity has not been involved with the preparation of the content supplied by CD Wealth Management and does not guarantee, or assume any responsibility for, its content. Fidelity Investments is a registered service mark of FMR LLC. Fidelity Institutional provides clearing, custody, or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC, Members NYSE, SIPC.

After nine consecutive weeks of gains, the S&P 500 finally fell last week, marking the end of the longest win streak since 2004. The end-of-the-year rally was strong, thanks to the Federal Reserve’s pivot that signaled interest rate cuts may be ahead.

After a late comeback from bonds, last year was the third-best year out of the last 20 for a global 60/40 stock/bond portfolio. Investors have already started to worry that the Santa Claus rally fizzled out, and the first five days of the year ended down. 

The markets have seen extreme strength since late October (and remember, the markets do not go up in a straight line). Some now worry that the gains of last year are in the rearview mirror because of mixed economic data, speculation about rate cuts and war in the Middle East.

The chart below shows that the first five trading days of the year have been negative 27 times over the last 70, years and the results have been mixed. In 12 of the 27 instances, negative returns for the S&P 500 have followed for an average downturn of 15%. However, the market finished up 14 times with an average return of 13.25%. We are not ready to determine how the year is going to finish based on five trading days.

A Negative First 5 Days Could Be a Warning Sign

 S&P 500 performance when the first five days are negative

The S&P 500 remains in close range to all-time trading highs. As of this writing, the S&P is a little more than 1% below its record high, set in January 2022. Some may worry that they have missed the rally or question if it makes sense to invest at these levels. Investing at all-time highs has not historically led to a meaningful difference in future returns.

Over the last 50+ years, if you invested in the S&P at all-time highs, your investment would have been higher 70% of the time one year later, with a median return of 12%. If you had invested at any time, the median return a year later would have been 10.5%.

You know the drill: We talk regularly about not timing the market, and we don’t see these circumstances any differently. We recognize that markets are near all-time highs, but that does not mean the market is not investible or that investors should wait for a potential pullback.

Stocks Have Historically Never Failed to Regain a Prior High

S&P 500 Index level and all-time highs, 1970-present

Historically, times like these — marked by slowing inflation, solid earnings growth and the Fed easing — tend to be a good time for stocks. Analysts expect double-digit earnings growth for 2024. At the same time, when inflation has been between 2% and 3%, stocks have returned an annual average rate of 14% going back to 1950. Another interesting tidbit is that in years when the Fed has cut rates without a recession, we have seen the strongest market returns.

Stocks Are in the Sweet Spot: Moderate Inflation & Accelerating Earnings

S&P 500 annual returns in different inflation environments, 1950-2022

The recession that many have been fearing since the start of 2023 has yet to materialize, and those who have been predicting a full recession have moved to a potential “soft landing.” The U.S. economy is strong, with GDP at 4.9%, unemployment under 4% and Consumer Price Index last reported at 3.1%. At year end, there was almost $6 trillion of cash sitting in money market funds.

A healthy economy may mean that the Fed does not cut rates as much as markets expect. Current economic numbers suggest that there will be no recession in 2024. While economic conditions appear solid, the bottom line is that there are sure to be surprises in the year ahead, as there have always been. This is an important time to remember that time in the market beats timing the market and waiting for bad news to bring the market down.

The CD Wealth Formula

We help our clients reach and maintain financial stability by following a specific plan, catered to each client. 

Our focus remains on long-term investing with a strategic allocation while maintaining a tactical approach. Our decisions to make changes are calculated and well thought out, looking at where we see the economy is heading. We are not guessing or market timing. We are anticipating and moving to those areas of strength in the economy — and in the stock market. 

We will continue to focus on the fact that what really matters right now is time in the market, not out of the market. That means staying the course and continuing to invest, even when the markets dip, to take advantage of potential market upturns. We continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, while not making investment decisions based on where we have been.

It is important to focus on the long-term goal, not on one specific data point or indicator. Long-term fundamentals are what matter. In markets and moments like these, it is essential to stick to the financial plan. Investing is about following a disciplined process over time.

Sources: Carson, JP Morgan

This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS) an affiliate of Kestra IS. CD Wealth Management and Bluespring Wealth Partners LLC* are affiliates of Kestra IS and Kestra AS.  Investor Disclosures: https://bit.ly/KF-Disclosures

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

Fidelity Investments and Fidelity Institutional® (together “Fidelity”) is an independent company, unaffiliated with Kestra Financial or CD Wealth Management. Fidelity is a service provider to both. There is no form of legal partnership, agency affiliation, or similar relationship between your financial advisor and Fidelity, nor is such a relationship created or implied by the information herein. Fidelity has not been involved with the preparation of the content supplied by CD Wealth Management and does not guarantee, or assume any responsibility for, its content. Fidelity Investments is a registered service mark of FMR LLC. Fidelity Institutional provides clearing, custody, or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC, Members NYSE, SIPC.

Market performance in 2023 marked a significant change from 2022, with almost every asset class outperforming the prior year. Both stocks and bonds rallied in November and December after a rough stretch from August to October. Through the first three quarters, bonds were down for the year but then posted their best quarter in more than 20 years in the fourth quarter.

U.S. large-cap stocks, led by the Magnificent Seven, outperformed all asset classes last year. Small-cap stocks made a year-end run after the Fed announced that it was probably finished raising rates and anticipating three rate cuts in 2024. Small-cap stocks had been hit hard earlier in the year following the Silicon Valley Bank crisis. Energy stocks finished the year flat after being the only positive sector in 2022, and Chinese equities pulled up the rear, being the only major asset class to finish in the red.

Each year there are defining themes that dominate the markets. In 2020, it was the global pandemic, which in turn caused the supply chain issues of 2021. In 2022, it was all about inflation. Last year, as we wrote often, it was the emergence of artificial intelligence.

Some of these market and economic themes can be positive while others are negative. As one theme gives way to another, it is important to remember not to get distracted by the narratives and to stick with the investment plan.

We cannot predict what theme will dominate the markets in 2024. The presidential election will be a likely candidate, but the markets historically have done a great job ignoring the election concerns that cause many investors to fret.

Key Themes in the Market by Year

Number of mentions in earnings call transcripts of Russell 3000 companies

This will be no ordinary election year. The below chart played out well last year, during the third year of the presidential cycle. With 2023 ending so strong, we would not be surprised to see a pause in equity markets to start the year and continue the trend of a weak first quarter during the fourth year of the presidential cycle, followed by strength the rest of the year. 

Q1 of an Election Year Tends To Be Weak

S&P 500 quarterly performance by presidential cycle (1950-2023)

As we recently wrote, we see many reasons to be bullish in 2024: 

1. Inflation continues to show signs of moderating to the Fed target of 2%.

2. Interest rates are normalizing. We expect bond yields to decline in line with falling inflation and slower economic growth. This year, we saw the 10-year Treasury span a huge range from as low as 3.25% in April to as high as 5.02% in October.

3. Consumers appear to have plenty of disposable money in their pockets. Consumer spending should grow more slowly as job gains dimmish. However, on aggregate, consumer financial conditions are nowhere near levels before the great financial crisis.

4. Household wealth and liquidity remain robust.

5. The U.S. government has committed more than $1.4 trillion for capital projects. This has the potential to reshape U.S. manufacturing and energy, and boost the semiconductor industry.

6. Economists expect corporate earnings for companies in the S&P 500 to grow by double digits in 2024. Increased earnings could provide a runway for stocks to head higher.

7. Almost $6 trillion of cash remains on the sidelines. Soaring yields in 2023 pulled cash into money market funds and other short-term instruments, such as Treasury bills and CDs. Lower rates in 2024 could force investors to move money into equities and longer-duration bonds to earn a higher rate of return as cash yields fall.

8. Artificial intelligence captured investors’ hearts last year and contributed to the outperformance of stocks led by the Magnificent Seven. AI applications are spawning innovation across many industries, not just in technology companies.

9. Presidential election years have been good for stocks. There is a tendency for investors to worry about elections (which could prove especially true for the upcoming election), but from a market perspective, that worry hasn’t had much of an impact. Going back to 1952, the stock market has declined just three times in a presidential election year.  In re-election years, the S&P 500 has not declined since 1948.  

It is good to remember that the average peak-to-trough correction per year is 14.2% since 1980 for the S&P 500. 

In 2023, stocks had a 10.3% correction, but finished the year up more than 24%. Even strong years have a correction where the market declines by 10% or more, and it is very rare for the market not to have at least a 5% pullback at some point in a year. 

Stocks Go Up and Down, and 2024 Won’t Be Any Different

S&P 500 Index max pullback per calendar year

Remember, much of what we read and hear on the news are market predictions for what economists and analysts think is going to happen. It seems like a long time ago, but at the beginning of 2022, the top 15 Wall Street firms predicted on average that the S&P 500 would finish at 4,950 (from a high of 5,330 to a low of 4,400) and the S&P 500 finished 2022 at 3,839 — a far cry from the prediction. The same analysts last year predicted on average that the S&P would finish 2023 at 4,100 (a high of 4,500 to a low of 3,725). The S&P closed 2023 at 4,769, a gain of over 24%.

For 2024, Wall Street economists see the S&P finishing anywhere from as low 3,300 to as high as 5,400. That is a 2,100-point spread!

At the end of the day, these are predictions, and no one knows for sure how this year will play out. What we do know is that over time, markets tend to rise and staying invested is the best strategy. 

The CD Wealth Formula

We help our clients reach and maintain financial stability by following a specific plan, catered to each client. 

Our focus remains on long-term investing with a strategic allocation while maintaining a tactical approach. Our decisions to make changes are calculated and well thought out, looking at where we see the economy is heading. We are not guessing or market timing. We are anticipating and moving to those areas of strength in the economy — and in the stock market. 

We will continue to focus on the fact that what really matters right now is time in the market, not out of the market. That means staying the course and continuing to invest, even when the markets dip, to take advantage of potential market upturns. We continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, while not making investment decisions based on where we have been.

It is important to focus on the long-term goal, not on one specific data point or indicator. Long-term fundamentals are what matter. In markets and moments like these, it is essential to stick to the financial plan. Investing is about following a disciplined process over time.

Source: Business Insider, Carson, Goldman Sachs, JP Morgan

This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS) an affiliate of Kestra IS. CD Wealth Management and Bluespring Wealth Partners LLC* are affiliates of Kestra IS and Kestra AS.  Investor Disclosures: https://bit.ly/KF-Disclosures

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

Fidelity Investments and Fidelity Institutional® (together “Fidelity”) is an independent company, unaffiliated with Kestra Financial or CD Wealth Management. Fidelity is a service provider to both. There is no form of legal partnership, agency affiliation, or similar relationship between your financial advisor and Fidelity, nor is such a relationship created or implied by the information herein. Fidelity has not been involved with the preparation of the content supplied by CD Wealth Management and does not guarantee, or assume any responsibility for, its content. Fidelity Investments is a registered service mark of FMR LLC. Fidelity Institutional provides clearing, custody, or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC, Members NYSE, SIPC.

One of the biggest financial storylines in 2023 was the performance of the market itself: Stocks bounced back from a difficult 2022, and though the ride wasn’t always smooth, those who stayed invested were rewarded for doing so.

Throughout the year, a number of different market themes arose — and as often is the case, some themes repeated themselves often.

ChatGPT and AI

As of January 2023, ChatGPT was the fastest-growing consumer software application in history. It is credited with starting the boom in artificial intelligence, as AI became the biggest market buzzword for the year. It seems inevitable that it will play an increasingly important role in the future economy, and investors appear to recognize the market is still in the early stages of an AI boom.

The Magnificent Seven

Investors loved the biggest stocks in the market, the mega-cap tech companies: Apple, Amazon, Alphabet (Google), Meta (Facebook), Microsoft, Nvidia and Tesla. All seven stocks have more than doubled the performance of the S&P 500.

Magnificent Seven Stock Performance

Banking crisis

U.S. regional bank stocks plummeted in early March after federal regulators shut down Silicon Valley Bank, the largest bank failure since the 2008 financial crisis. 

U.S. credit rating downgrade

Fitch, one of the three main credit rating agencies, downgraded the U.S. long-term credit rating to AA+ from AAA. Moody’s lowered its outlook to negative, as confidence in the U.S. government to navigate shutdowns and increased spending continued to wane.

Inflation

The Federal Reserve continued to raise interest rates in the first half of 2023. Investors finally saw signs that the Fed’s monetary policy tightening was paying off, as inflation started to decrease. CPI decreased from the peak of 9.1% in June of 2022 to 3.1% as of November 2023.

Interest rates

The Fed’s “higher rates for longer” position replaced “Don’t fight the Fed.” The Fed raised interest rates four times during 2023, the last of which was in July. At the last Fed meeting, Chairman Jerome Powell hinted that the Fed may cut interest rates at least three times next year.

Recession — yes or no?

This continues to be a heavily debated topic by Wall Street economists. If we have a recession, can the Fed engineer a “soft landing” or will it continue to be a series of rolling recessions by sector? 

The CD Wealth Formula

We help our clients reach and maintain financial stability by following a specific plan, catered to each client. 

Our focus remains on long-term investing with a strategic allocation while maintaining a tactical approach. Our decisions to make changes are calculated and well thought out, looking at where we see the economy is heading. We are not guessing or market timing. We are anticipating and moving to those areas of strength in the economy — and in the stock market. 

We will continue to focus on the fact that what really matters right now is time in the market, not out of the market. That means staying the course and continuing to invest, even when the markets dip, to take advantage of potential market upturns. We continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, while not making investment decisions based on where we have been.

It is important to focus on the long-term goal, not on one specific data point or indicator. Long-term fundamentals are what matter. In markets and moments like these, it is essential to stick to the financial plan. Investing is about following a disciplined process over time.

Source: Morningstar

This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor regarding your individual situation.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS) an affiliate of Kestra IS. CD Wealth Management and Bluespring Wealth Partners LLC* are affiliates of Kestra IS and Kestra AS.

Investor Disclosures: https://bit.ly/KF-Disclosures

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

The Santa Claus stock market rally came a little early this year. Last week, the Federal Reserve left interest rates unchanged and signaled the end of the hike cycle. The Fed acknowledged that inflation is easing faster than expected and that several Fed members favor cutting interest rates in the first half of 2024. The Fed’s statement also acknowledged that the pace of economic activity is slowing.

Bond yields fell on the news, and the stock market rallied. Fed Chairman Jerome Powell emphasized that the risk of not doing enough to curb inflation is now balanced with the risk of holding rates too high for too long and in turn, potentially breaking the economy in the process. As seen in the chart below, before the Fed announcement, the market wasn’t expecting an interest rate cut before the third quarter of 2024 — and now, following last week’s Fed meeting, as many as six rate cuts are being priced in next year.

Markets Expect 6 Rate Cuts in 2024

There are plenty of reasons we believe in being bullish as we head into 2024:

1. Inflation continues to show signs of moderating to the Fed’s target of 2%.

2. Interest rates are normalizing. We expect bond yields to decline in line with falling inflation and slower economic growth. This year, we saw the 10-year Treasury span a huge range from as low as 3.25% in April to as high as 5.02% in October.

3. Consumers appear to have plenty of disposable money in their pockets. Consumer spending should grow more slowly as job gains diminish, but on aggregate, financial conditions are nowhere near levels before the great financial crisis.

4. Household wealth and liquidity remain robust.

5. The U.S. government has committed more than $1.4 trillion for capital projects. This has the potential to reshape U.S. manufacturing and energy — and boost the semiconductor industry.

6. Economists are expecting corporate earnings for companies in the S&P 500 to grow by double digits in 2024. Increased earnings could provide a runway for stocks to head higher.

7. Almost $6 trillion of cash remains on the sidelines. Soaring yields in 2023 pulled cash into money market funds and other short-term instruments, such as Treasury bills and CDs. Lower rates in 2024 could force investors to move money into equities and longer-duration bonds to earn a higher rate of return as cash yields fall.

8. Artificial intelligence captured investors’ hearts this year and contributed to the outperformance of stocks led by the Magnificent Seven stocks. AI applications are spawning innovation across many industries, not just in technology companies.

9. Presidential election years have been very good for stocks. There is a tendency among investors to worry about elections — especially now. But going back to 1952, the stock market has declined only three times in a presidential election year. In re-election years, the S&P 500 has not declined since 1948.

S&P 500 Performance Has Been Positive in Most Presidential Election Years Since 1952

Markets do not go up in a straight line, and we expect volatility to continue in 2024. Over the last five years, we have experienced two bear markets, a worldwide pandemic, high inflation and surging interest rates. All the while, the S&P 500 has doubled during this time.

The market hit an all-time high in early 2022, only to see equities and bonds fall precipitously, with both asset classes ending 2022 down big. In 2023, we saw a sharp reversal, led by the Magnificent Seven: Alphabet (Google), Amazon, Apple, Meta (Facebook), Microsoft, Nvidia and Tesla. The S&P 500 is closing in on a new all-time high as we near the end of 2023.

We have referred to the below chart before: On average, there has been at least one 10% market correction each year since 1950, and there is no reason to think that 2024 will be any different.

Volatility Is the Toll We Pay to Invest

S&P 500 per year (1950-2022)

Inflation, Fed policy, artificial intelligence and the Magnificent Seven dominated the market headlines in 2023. Those same topics, along with the upcoming presidential election, will be top of mind as we head into 2024. But over the long term, returns are driven by fundamentals and not the latest noise.

In the year ahead, it will be critical to remember that there are things in your control and things out of your control. Spending time and energy on the things you can control will make it easier to withstand any potential headwinds that may occur. 

We look forward to the challenges and opportunities that lie ahead, and we look forward to guiding you through the upcoming year.

The CD Wealth Formula

We help our clients reach and maintain financial stability by following a specific plan, catered to each client. 

Our focus remains on long-term investing with a strategic allocation while maintaining a tactical approach. Our decisions to make changes are calculated and well thought out, looking at where we see the economy is heading. We are not guessing or market timing. We are anticipating and moving to those areas of strength in the economy — and in the stock market. 

We will continue to focus on the fact that what really matters right now is time in the market, not out of the market. That means staying the course and continuing to invest, even when the markets dip, to take advantage of potential market upturns. We continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, while not making investment decisions based on where we have been.

It is important to focus on the long-term goal, not on one specific data point or indicator. Long-term fundamentals are what matter. In markets and moments like these, it is essential to stick to the financial plan. Investing is about following a disciplined process over time.

Sources: Baird, Carson, FS Investments, JP Morgan, Schwab

This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS) an affiliate of Kestra IS. CD Wealth Management and Bluespring Wealth Partners LLC* are affiliates of Kestra IS and Kestra AS.  Investor Disclosures: https://bit.ly/KF-Disclosures

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

Fidelity Investments and Fidelity Institutional® (together “Fidelity”) is an independent company, unaffiliated with Kestra Financial or CD Wealth Management. Fidelity is a service provider to both. There is no form of legal partnership, agency affiliation, or similar relationship between your financial advisor and Fidelity, nor is such a relationship created or implied by the information herein. Fidelity has not been involved with the preparation of the content supplied by CD Wealth Management and does not guarantee, or assume any responsibility for, its content. Fidelity Investments is a registered service mark of FMR LLC. Fidelity Institutional provides clearing, custody, or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC, Members NYSE, SIPC.