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2024 First Quarter Insights

January 2024 • Edition 33

The 4 Disciplines of Investing for Retirement and Wealth Creation

1. “Investing is a marathon and not a sprint.”
2. “Do no harm.”
3. “Knowledge creates success; stay calm, objective and long-term oriented.”
4. “Choose carefully what you read and to whom you listen.”


“The pessimism of 2023 was overstated; worrying dynamics had surprisingly more favorable outcomes – at least in the markets’ eyes. In 2024, we appear to have the opposite view: uber-optimism leaves the markets vulnerable to disappointment.”
– Lawrence V. Adams, lll, Chief Investment Officer, Raymond James

2023 was certainly an interesting year at a minimum. As I had written in the 2023 Third Quarter Insights and in the Second Quarter of 2020 Insights, monetary policy is a key driver of risk assets. As we witness in much of 2023 the position of the Federal Reserve was of tighter monetary policy and higher Interest rates for longer. This position had a direct effect on most risk assets for most of the year until we got half way through the fourth quarter. In the fourth quarter we saw inflation continue to wane and a softening of the Federal Reserve’s stance on short-term interest rates. The result, was an almost parabolic rise in risk assets in a very short time based upon the thought of the Federal Reserve reducing interest rates significantly in 2024, by some measures 7 quarter point cuts in 2024. Now that sounds awesome as an investor, but as we will discuss later, it might leave the markets vulnerable to disappointment.

Inflation

Inflationary data continued in a disinflationary direction in the fourth quarter with Consumer Price Index (CPI) and the Personal Consumption Expenditures Price Index (PCE) both continuing cool from their 2022 highs. Energy prices including gasoline have declined during the fourth quarter. Inflation seems to have peaked and most likely will not be the big headline of 2024.

BW-2024-1stQuarter-Chart1

Source: U.S. Bureau of Labor Statistics

Leading Economic Indicators and the Yield Curve

The Conference Boards Leading Economic Indicator Index (LEI) declined for a 20th consecutive month in December and continues signaling a recession. All prior streaks that have lasted longer than 12 months have resulted in a recession.

BW-2024-1stQuarter-Chart2

Source: The Conference Board

Below is an updated chart of the spread between the 3-month Treasury yield and the 10-year Treasury yield. When this yield curve inverts, it tends to be a reliable predictor of a recession. This yield curve inverted in October of 2022 and has an average 589-day lead time from date of inversion to the start of a recession.

BW-2024-1stQuarter-Chart3

Monetary Policy

Currently the Federal Funds Rate (target rate) is 5.25% to 5.50%. The markets are expecting a large number of cuts to this rate in 2024. Theoretically, lower rates are good for risk asset prices. But as history has shown that when/if the Federal Reserve were to get very aggressive with its interest rate policy and rapidly reduce rates, it is generally for the wrong reasons. Rapid reductions of the Federal Funds Rate often are made because the economy is headed for a recession or in a recession. The economy has weakened to merit such rapid rate cuts. Examples of this are 2001 and 2007. At this point, I do not believe this to be the case, I do believe that any recession would be minor and that the Federal Reserve will be guarded with their policy rate for the following reason. The fear of reigniting the inflation fire if they were to get aggressive when loosening monetary policy. A resurgence and reacceleration of inflation would be worse outcome for the Federal Reserve then a gradually slowing US economy or a mild recession.

Summary

Over the short-term we are maintaining our cautious view on risk assets but are bullish over the intermediate to long-term. We believe inflation peaked in 2023 along with interest rates and the Federal Reserve could possibly turn dovish in the second half of 2024. With potentially lower inflation and lower interest rates, this could set up for a more favorable investing environment for risk assets in the second half of 2024.

Written by: Nicholas W. Sergio, AIF®
Founder & Chief Investment Officer • Banyan Wealth
Registered Principal & Financial Advisor • RJFS
2024 RJFS Leaders Council Member*
nick.sergio@raymondjames.com
banyanwealth.com/

The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The NASDAQ composite is an unmanaged index of securities traded on the NASDAQ system. Dow Jones Industrial Average (DJIA) commonly known as “The Dow” is an index representing 30 stocks of companies maintained and reviewed by the editors of the Wall Street Journal. The Russell 2000 Index measures the performance of the 2000 smallest companies in the Russel 3000 Index, which represents approximately 8% of the total market capitalization of the Russel 3000 Index. BPS stands for Basis Points and refers to a common unity of measure for interest rates, one basis point is equal to 1/100th of 1% or 0.01% it is used to denote the percentage change in a financial instrument. Inclusion of these indexes is for illustrative purposes only. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of capital might occur. All investing involves risk and you may incur a profit or loss of capital. There is no assurance any investment strategy will be successful. All information, data and analysis provided in this report is for informational purposes only and is not a recommendation to buy or sell any security. This report does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete; it is not a statement of all available data necessary for making an investment decision and it does not constitute a recommendation. Any opinions are those of Nicholas Sergio and not necessarily those of Raymond James and are subject to change without notice. Raymond James does not offer tax advice and services. You should discuss any tax matters with the appropriate professional. Holding investments for the long term does not insure a profitable outcome. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. High-yield bonds are not suitable for all investors. The risk of default may increase due to changes in the issuer’s credit quality. Price changes may occur due to changes in interest rates and the liquidity of the bond. When appropriate, these bonds should only comprise a modest portion of a portfolio. Investment advisory services offered through Raymond James Financial Services Advisors, Inc.

* Membership is based on prior fiscal year production. Re-qualification is required annually. The ranking may not be representative of any one client’s experience, is not an endorsement, and is not indicative of advisor’s future performance. No fee is paid in exchange for this award/rating.

https://www.bls.gov/cpi/
https://www.conference-board.org/topics/us-leading-indicators
https://fred.stlouisfed.org/series/T10Y3M
https://www.federalreserve.gov/
https://www.newyorkfed.org/markets/reference-rates/effr