What Top Market Strategists Are Predicting for 2024

Portfolio returns have been on a tear in 2023, especially in contrast to the brutal year that investors experienced in 2022.

As of late December, the S&P 500 had climbed roughly 25%, while the Blackrock 60/40 Target Allocation Fund was up 12.5%. The performance of bond portfolios, meanwhile, has improved significantly over just the past eight weeks, with what appeared likely to be another negative year for bonds turning into a pleasantly positive one.

According to experts convened for a recent ThinkAdvisor webcast, organized in partnership with the Investments & Wealth Institute, this is a textbook moment for investors to pause and take stock of their positions.

Yes, performance has been solid, but there are compelling arguments to be made about both the risks and opportunities that may emerge in 2024 across all manner of asset classes, especially fixed income.

Speakers on the webcast included Ryan Detrick, chief market strategist at Carson Group; Robert Miller, CEO at Frontier Asset Management; and Zachary Christopher, a client portfolio analyst for Hightower Advisors. The trio offered a variety of perspectives about what’s in store for investors next year, but they all agreed with the sentiment that advisors must be vigilant.

That doesn’t mean that investors should rush out and make ill-timed trades or try to time the market. Rather, this is the time to reassess any progress that has been made toward long-term goals, and to ask whether there is an opportunity to refine portfolio strategies moving forward.

A Tale of Two Equity Markets?

When it comes to the positive performance of the equity markets in 2023, one word came to mind for the panel — concentration. They all agreed that the question of whether performance can continue to diversify away from the biggest names in 2024 will help to determine what kind of a year that stock market investors have.

The past eight weeks have seen this hoped-for diversification in performance (or “participation”) begin to happen, Detrick noted, but it’s anyone’s guess whether that will continue. For their part, the panel voiced a cautious sense of optimism, especially Detrick.

As the panel explained, the so-called “Magnificent 7” — a term referring to the grouping of Apple, Microsoft, Amazon, Alphabet, Nvidia, Tesla and Meta — saw very strong performance through the waning days of December.

These companies’ gains have moderated more recently, but they have still posted very solid returns for the year and are responsible for the majority of the positive 2023 performance.

The result of this dynamic, Detrick said, is that any investors whose portfolio strategies have seen them underweight these key names have seen their performance lag significantly behind the full market index. This has delivered a difficult year for active fund managers who bet against sectors like technology and communications — or the Nasdaq as a whole.

“The tech and communication sectors have done so well this year, with some indexes posting gains above 50%,” Detrick said. “What is encouraging to us looking ahead is that we do see evidence that this performance will continue to broaden out. That would be a great thing for investors.”

More Than the Magnificent 7

In arguing that 2024 could see impressive and more diversified performance for stocks, Detrick pointed out that recent weeks have seen more than 90% of the stocks in the S&P 500 closing above their 50-day moving averages.

“This might mean we are near-term overbought, but you also tend to see this kind of strength at the beginning of bullish moves,” he suggested.

As Detrick noted, in previous times over the past 20 years that the market saw such strong participation, the S&P 500 was higher a year later 14 out of 15 times — and up 16.1% on average. This is yet another clue that stocks could be in a for a nice year in 2024, he argued.

Miller and Christopher broadly agreed with that take, and with the suggestion that investors may benefit from rotating back toward small-caps stocks in 2024. Miller also pointed to attractive opportunities in emerging markets (with the potential exclusion of China), while Christopher highlighted the potential for significant diversion between value and growth-oriented investments.

Christopher and the others also argued that 2023 showed that “60/40 isn’t dead,” especially with the performance posted by bond managers over the past several weeks. Looking ahead, there is good reason to argue that diversification and maintaining a long-term perspective will serve investors well next year.

All Eyes on the Yield Curve

As Miller and Christopher emphasized, one clear conclusion is that early 2024 will remain a good time to be an investor in cash and cash-like assets, given where interest rates stand. What is far less clear is what the picture will look like by mid-2024 and beyond.

Miller emphasized the signals being sent by the yield curve, which remains inverted.

“One of the big questions to ask is, what will move to get the yield curve right?” he suggested. “Will short-term rates come down or will long-term rates go higher? I would say the consensus view today is that change will have to happen on the short side, and those rates will come down at some point. … The 10-year Treasury being at 3.8% or so means it is in the right spot if we get inflation back down towards the Fed’s target of 2%.”

Of course, there is no guarantee that everything will work out so nicely, even as market participants hope for an illusive soft landing. Inflation could spike again, which would once again throw the market’s expectations of meaningful rate cuts starting next year into disarray.

“Big question remain, but one thing we know is that the curve will experience some movement,” Miller said.

Could a Cut Come in March?

While stressing his respect for the other experts’ point of view, Detrick offered up a bit of a contrarian perspective, arguing that inflation remains high at the aggregate level, but that is thanks to certain key economic sectors — such as shelter and used cars — that continue to prop up the overall gauge.

As Detrick emphasized, other important core components of the Federal Reserve’s inflation measures are not running red hot — far from it, in fact. He also said there is evidence that the Fed’s preferred sources of data are running a step behind the real world, citing private data showing, for example, that both housing and used car prices have been falling for months.

“That weakening is not showing in the Fed’s data yet, with shelter for example still running close to 6% in the official reporting,” Detrick said. “We actually think a cut could come as soon as March, which is a bit of a contrary perspective.”

If multiple rate cuts do happen according to the consensus view, the operative question for investors will be to ask why the Fed is cutting. Is it because the economy is weakening? Or is it because the Fed feels it has room to make its coveted soft landing?

Complex Picture for Bond Managers

One consensus view shared by the panel was that bond managers are breathing easier as 2023 draws to a close compared with how they were feeling even just two months ago. At that time, an aggregate bond portfolio remained down 2% to 3%. Today, the big aggregate bond portfolios are up 4% to 5%.

“The bond managers did get a bit of a Hail Mary in the last part of the year,” Christopher said.

“They were looking at the prospect of three negative years of performance in a row, which would have been hard to swallow,” Detrick noted. “It’s pretty amazing to see, just given where bond portfolios were just seven or eight weeks ago.”

What these trends spell for 2024 remains an unknown, the panel agreed, but there are some potential steps to consider in the weeks and months ahead.

Detrick noted that Carson Group recently extended the maturity profile of its fixed income recommendations, moving closer to the duration of the broad Bloomberg U.S. Aggregate Bond Index, which is a market-capped weighted index of investment-grade US Treasurys, mortgage-backed securities and corporates.

“We do continue to prefer stocks to bonds based on our positive outlook for the U.S. economy in 2024,” Detrick said. “But as inflation continues to decline, we think core bonds will increasingly return to their traditional role as a portfolio diversifier and ballast against potential stock losses while still offering an attractive yield.”

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