Cheers to a New Year
The US economy and stock market performed better in the second half of 2023 than many anticipated. Despite the fears of a slowdown, the economy remained resilient; bringing job growth, increased consumer spending, and a higher GDP expansion than expected. A downward trend in inflation has many believing that the “soft landing” targeted by the Federal Reserve may come to fruition after all.
Investment markets rallied in turn, spurred by the Fed’s announcement of a pause in interest rate increases and the potential for multiple decreases in 2024. US stocks, as measured by the S&P 500 gained 11.69% for the quarter and ended the year just shy of the all-time closing high, set back on Jan 3, 2022. Non-US stocks (EAFE index) rose 10.42% and the Bloomberg US Aggregate Bond index rose 4.67% for the quarter, all together cementing a strong year of growth for most categories of investments.
As we look ahead to 2024, cautious optimism may once again be prudent. There appear to be risks to the consumer outlook; the personal savings rate has fallen below the long-term average and pandemic era excess savings appear to be exhausted. Auto loan and credit card delinquencies have increased and, together, this could mean reduced consumer spending. If so, it would help to ensure inflation remains in check, but could hurt business earnings. Consumer spending represents nearly 70% of the US economy, so any reductions can have a meaningful impact. Interestingly, spending has remained unphased thus far, potentially due to rising income, which has increased for the last 22 months straight.
Cash balances will be another interesting metric to watch. The rise in interest rates over the last two years, coupled with investment fears, has driven money market assets to an all-time high. Currently, individuals and institutions hold over $8 trillion of cash in money markets, essentially stockpiled on the sidelines. Fed projections and anticipated changes to yields will make holding large cash balances less appealing moving forward. As a result, that money will likely seek out different opportunities, which could benefit stock and fixed income markets.
Finally, 2024 is a presidential election year. While that doesn’t necessarily correspond with positive or negative investment results, it does bring a heightened sensitivity to economic news and often increases speculation (and market volatility). Broader geopolitical risks remain, though initially appear to be similar
to 2023, headlined by wars in Ukraine and the Middle East.
As we close out another year, we remain humbled and grateful for the trust you have placed in us. Thank you for your continued partnership and allowing us to be a part of your journey.
The PWM Team
