Review & Outlook
January 10, 2024
Over the past two months, diversified portfolios finally came back into favor after experiencing an extremely narrow market where only the largest companies made progress. The market pivot that started in November allowed us to aggressively lower our cash reserve target to buy stocks with favorable pricing and good prospects. And while this turn did not make up for the relative underperformance experienced in most of 2023, we strongly believe this will be short-lived and expect the market to gravitate towards Growth, rewarding our holdings as the New Year unfolds.
On many fronts, we believe pandemic era trends are firmly behind us as inflation continues to fall and supply chain disruptions are no longer hampering production. An economy marked by high investment, high productivity and strong labor will undoubtedly boost profits, and we see a more normal cycle ahead than the volatile one we are just now exiting. In our opinion, we have reached a turning point in markets that should reward a broader range of companies versus a select few.
Our View for 2024
The Economy
Interest Rates decline slowly but steadily, providing a positive impulse to the large portion of the economy dependent on credit.
Labor markets remain robust while wage growth and job openings come down from their lofty pandemic heights.
Investment in infrastructure, energy and advanced chip technology will boost productivity and help contain inflation.
Growth will decelerate but not fall off a cliff in 2024, with a recession increasingly unlikely.
Stocks
Earnings Growth will be positive after more than a year of declines.
Profit Margins steadily move up as supply chain disruptions diminish and inflation comes down to tolerable levels.
Quality Growth stocks will perform well as narrow leadership in Tech stocks gives way to
broader participation among previously downtrodden issues.
Fixed Income
Interest Rates have peaked, however further gains from bonds in 2024 are unlikely as rate cuts have been firmly priced in.
Treasury Bills will remain a key supplement to our cash management in 2024 and beyond, as we are unlikely to return to a zero-interest rate environment any time soon.
Final Thoughts
While we expect the momentum from the end of 2023 to continue, there will be bumps along the way in 2024. The overhangs of the Ukraine/Russian war, the Israeli conflict and the Presidential election will increase volatility. This will most likely lead our activity to be slightly higher in 2024 versus last year as we take gains and reallocate to more attractive opportunities. Bonds and short-term U.S. Treasury Bills will continue to offer an attractive alternative with longer term maturities becoming more appealing. Our current Cash Reserves for Equities stands at 8%, and while this is low on an historical basis, we are confident this level is appropriate as we focus more on rotation among issues rather than pulling back exposure. We are optimistic about the markets over the next twelve months and believe Quality Growth companies will shine.
As always, feel free to call us to review your investment progress or with any questions you may have.
Warmest Regards,
Daniel A. Kane, CFA
President
Stephen F. Knapp, CFA
Director of Research
