Investing: What’s In Store for 2024?

The New Year has brought with it new all-time highs for the equity markets. The S&P 500 closed above 5,000 for the first time in early February, and the Dow Jones Industrial Average continues to flirt with the 39,000 mark. What led to the strong market recovery in 2023…and will it continue into 2024? 

Looking Back

To answer these questions, we must go back to the beginning of the pandemic in 2020. The equity markets had just posted record highs in February of 2020. A month later, the World Health Organization officially declared COVID-19 a pandemic. Within weeks, economies around the world shut down in hopes of curtailing the spread of the disease. By mid-March, the S&P 500 had fallen more than 33% as investors fled the markets.

Here in the U.S., the federal government responded by taking steps to help minimize the shutdown’s financial impact on individuals and businesses. Among these efforts was a rapid reduction in interest rates, billions of dollars in bond buy-backs, and trillions of dollars in economic stimulus.

Potential Risks

It was widely accepted amongst economists and market strategists at the time that these efforts would have inflationary repercussions. But the potential risks seemed warranted given the unprecedented circumstances. Making matters worse, supply-chain disruptions led to shortages, further exacerbating the problem. It became only a matter of how long it would take for inflation to filter down into the economy…and how bad would it get?

Fueled by stimulus payments, historically low interest rates, and increasingly high demand for everything technology-related, the equity markets staged a massive recovery through the end of 2020, resulting in an annual gain of 18.4% for the S&P 500. This trend continued through much of 2021, and the S&P 500 finished the year up another 28.7%.

All was not well, however, as the much-anticipated inflation finally began to take hold.

The Backdrop

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By January 2022, the Consumer Price Index (the U.S. Government’s inflation gauge) had risen to an annualized rate of around 7.5%…far above the Fed’s 2% target rate. With hopes of bringing inflation under control, the Fed began a series of interest rate hikes, and by year-end, the Fed Funds rate had increased from 0.25% to 5.50%.

It’s important to note that the stock market does not react well to inflation or rising interest rates. As a result, 2022 ended with a decline of 18.1% on the S&P. Adding insult to injury, investors also suffered significant losses in their fixed-income investments as bond prices fell in response to rising interest rates.

At this point, you may be wondering why so much of this article has been devoted to recapping events dating back to 2020. Simply put, it was so that we could better understand what drove the stock market’s gains in 2023 and to help set the backdrop for 2024.

The Market

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It was noted previously that rising inflation is generally bad for stock prices. Therefore, it makes sense to assume that stock prices would recover once inflation began to dissipate. This is exactly what happened last year.

By the end of 2022, inflation had already begun to fall from its peak of nearly 10%. Throughout 2023, the CPI continued to decline, settling in at 3.4% by year-end. While still well above the Fed’s intended target of 2%, investors grew much more confident that inflation was coming under control. Indications from the Fed that it could begin lowering interest rates in 2024, coupled with low unemployment and a generally resilient economy, led to a strong recovery in stocks. The S&P 500 ended the year with a gain of more than 26%.

This growth was not felt throughout the entire market, however. In fact, the performance of the market was very concentrated, with only seven companies (“The Magnificent Seven”) driving nearly 70% of the S&P 500’s returns.

What does all of this tell us about 2024? The equity markets began the year 2024 trading very close to their estimated fair values, based upon Morningstar analytics. Technology and Communication Services stocks…those that dominated the S&P 500’s performance in 2023…have been trading at elevated prices. However, many other sectors which did not participate in the 2023 recovery have remained underpriced, leaving open the possibility that companies within these sectors may have room to grow during the coming year. 

Recognizing Volatility

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History has taught us that the stock market favors a low-interest rate environment, and expectations remain that the Fed may be ready to begin lowering rates later this year. In theory, this would also be positive for stocks, especially if it is accompanied by low unemployment and a stable economy.

Despite this, we cannot ignore the possible sources of volatility in 2024. Notably, the upcoming presidential election is sure to create angst among investors. The ongoing war in Ukraine, the conflict between Israel and Hamas, and rising tensions between the U.S and China over Taiwan may also provide market headwinds throughout the year.

It’s impossible to know how the markets will fare in 2024. Given the issues noted above, volatility, both positive and negative, would not be unexpected. However, it’s important to remember that the markets are very resilient. The best way to navigate short-term volatility is to have a solid long-term investment strategy focusing on diversification. Keeping this in mind helps investors remain patient, not getting overly excited about the market’s highs or concerned about the market’s lows.

If you have any questions about your investment strategy, please contact your planner.

S.E.E.D. Planning Group LLC (S.E.E.D.) is a Registered Investment Advisor (RIA) with the Securities Exchange Commission. S.E.E.D.’s team provides investment fiduciary and financial planning services to clients. Our fees are disclosed, easy to understand, and not predicated on product sales.