Markets Lift a Half-Full Glass to 2024

What a difference one year makes heading into 2024. Last year at this time, many were worried about whether we would see a recession in the months ahead.

By all accounts, it looks as if the best-case scenario has played out in the form of a soft landing. Indeed, we are kicking off the new year with a glass that is very much half full — toasting to an economy that once again has proved to be resilient.

In 2024, we expect the markets to continue to be hypersensitive to Fed policy. In December, the Federal Reserve gave everyone an early holiday present, signaling that it is done with rate hikes and that it will probably begin lowering rates in the second half of 2024. The Fed’s inflation-fighting strategies over the past two years appear to have done the job as inflation appears to be sustainably heading down toward the Fed-preferred 2% range — and a bounce back in the months ahead remains a risk but is not our base case. 

Moving forward, Fed policy should stabilize as long as employment and inflation continue to maintain trend.

The major indexes have been on a tear since the Fed signaled that lower interest rates may be in the near future. The S&P 500 came close to an all-time high; meanwhile, the Dow closed at another record, and the Nasdaq also continued its climb, even though it saw mostly top-heavy growth in 2023. 

This is a major reversal compared to how we closed out 2022, when both the equity and bond markets closed negative for the year. We’ve also mostly been cured of the inventory and supply chain problems that once threatened the overall economy. Companies stand to reap the benefits in the form of strong margins and earnings that come in above expectations in the year ahead — and that should drive equities higher.

With that as a backdrop, I can see the Fed cutting one or two — and maybe even three — times in 2024. And if that happens, it will only pour more fuel on a strong-and-steady economy. 

When considering investment strategies for the coming year, keep in mind that if things continue on the same path, we could see a revived housing market in 2024. Banks also stand to benefit from increased mortgage demand, while business capital expenditures that have been on hold in the current environment should come back online in the year ahead. A normalizing yield curve and interest rate stability will continue to support this broadening performance in equity markets and a strong economy.

The Bright Side

In its latest forecast, the Congressional Budget Office sees the U.S. inflation rate easing closer to the Fed’s 2% target in 2024. The agency expects personal consumption expenditures — the Fed’s preferred measure of inflation — cooling to 2.1% in 2024. Excluding energy and food costs, the gauge is set to ease to 2.4% from 2023 and hit 2.3% by 2025, according to the data.

At the same time, the economy is nowhere near recessionary levels. On Dec. 21, weekly jobless claims rose by less than forecast, remaining near historic lows and indicating a strong employment environment. In addition, retail sales data for November beat forecasts, showing that U.S. consumers were spending during the holiday season. Add to that an ongoing revival on the housing front, as single-family homebuilding surged to more than a 1-1/2-year high in November and stands poised to gain further momentum in the year ahead.

Meanwhile, there’s still a long-term catalyst brewing around the need for new housing for individuals. Lower mortgage rates in 2024 could only push this forward. These arrows all point to an uptick in housing activity in 2024.

Housing, of course, is a big multiplier for the rest of the economy. If you buy a new house, you’re also going to need new furniture, new appliances, maybe even a new car … you see where this is going. 

How I’m Investing Right Now

Looking at the data, now is a good time to optimize a portfolio to be ready to profit off a housing resurgence. Going into 2024, I remain bullish on companies with earnings momentum — benefiting from lower inflation costs, pricing power, restored inventories and secular demand. This includes technology, industrials and discretionary names.

I also think the coming election year will have a big impact on consumer sentiment, ultimately giving it another boost. As I’ve been saying: Don’t bet against the U.S. consumer. As long as the jobs market remains healthy, I see consumer sentiment remaining strong. This is only win-win for overall corporate earnings and the economy.

On the other hand, heading into 2024 I am not as bullish on the mega-cap tech companies that were a huge driver of the S&P 500’s major rally in 2023. Expectations for many of these companies are at exceedingly high levels. While I still expect them to perform in 2024, I don’t expect to see a repeat of the outperformance that we saw in 2023.

There also continues to be a disconnect in the capital raising for the energy space, as a lot of energy companies are continuing to push share buybacks and dividend programs. It continues to be a good place to be, as I don’t see commodity prices soaring unless there’s an external factor, such as a geopolitical incident that cannot be predicted. The bottom line is overall energy continues to be an attractive space. It’s also a great diversifier for a portfolio.

Hightower’s Zachary Christopher, client portfolio analyst, contributed to this column.

Stephanie Link is chief investment strategist and portfolio manager at the national wealth management firm Hightower Advisors LLC. She leads the firm’s Investment Solutions Group. Follow Stephanie on LinkedIn and X. Read her regular market insights here.