Investment Outlook

February, 2024

13th Annual

Legend avers that an ambitious young man once found himself in the immediate presence of the late J. Pierpont Morgan. He ventured to inquire of Mr. Morgan’s opinion as to the future course of the stock market. The alleged reply has become a classic. 

“Young man, I believe the market is going to fluctuate.”

Of course, nobody complains when the markets fluctuate upward, as in 2023. How, why, and what it means will be the subject of this, my 13th annual Investment Outlook.

2023 in Review

By any objective measure, 2023 was a very good year for the markets. The raw numbers show it (full performance data here).

The S&P 500 finished the year up 26 percent (up 12 percent since the start of November alone), just 0.6 percent from its January 2022 all-time high, which has since been topped. The Dow Jones Industrial Average advanced 14 percent to top 37,000 for the first time and set seven record closes in the final days of 2023. A mania surrounding big technology stocks sent the Nasdaq Composite soaring 43 percent, its best year since 2020.

The consensus was very negative entering 2023, as the then-bear market was expected to continue. Yet, despite that consensus and a regional banking crisis in March, we saw an outstanding first half of the year for stocks. The third quarter was rough, as war broke out in the Middle East in September, but markets – stocks and bonds – rallied into the new year, after cyclical lows in October. 

These moves were fueled by a surprisingly strong economy, lessening inflation, the artificial-intelligence ambitions of technology firms, better-than-expected corporate earnings and, most recently, the prospect of the Federal Reserve lowering short-term interest-rates sometime in 2024. Even the bond market perked up late in 2023, after a historic downturn, one that briefly sent yields to highs not seen since before the 2008-09 financial crisis.

A blockbuster earnings report from Nvidia in May crowned the graphics-chip maker as the stock market’s next star and launched a frenzy around AI that persisted for much of 2023. This enthusiasm propelled tech shares higher, helping mask poor performance in other corners of the stock market. Nvidia more than tripled to lead the S&P 500. The so-called “Magnificent Seven” replaced FANG (or FAANG) as the favored nickname for the market’s leaders. 

Nvidia, Apple, Microsoft, Alphabet, Amazon, Tesla, and Meta Platforms swelled to represent about 30 percent of the S&P 500’s market capitalization and were responsible for much of its 2023 gains. In fact, they now have a greater weighting in the MSCI World Index (a benchmark that covers about 85 percent of the global investible equity market) than all the stocks of the U.K., China, France, and Japan combined. The Magnificent Seven jumped about 75 percent in 2023, while the other 493 companies in the S&P 500 gained about 12 percent, leaving the index as a whole with its 26 percent gain.

Given the above, from a sector perspective, nobody should be surprised that technology led the way, up 56 percent in 2023. Communication services rallied 54 percent while the consumer discretionary sector witnessed over 41 percent returns, among its best years on record. To the downside, utilities and energy brought up the rear, declining 10 percent each.

Since the beginning of November, an “everything rally” has pushed up prices of assets – from gold to bitcoin to risky corporate bonds and investments in far-reaching corners of the stock market. The S&P 500 ended 2023 on a nine-week winning streak, its longest such rally since January 2004. Even Bitcoin prices more than doubled last year.

The contrast to 2022 is remarkable.

Entering 2023, Fed Chair Jerome Powell said the Federal Reserve would “stay the course” with rate hikes “until the job [was] done.” While inflation was slowing, it was still quite high, and the labor market was out of balance. Amid what felt like more than the usual amount of uncertainty, the vast majority of economists and a record number of CEOs said they expected a recession. 

Following that came bank stress, the debt ceiling and government shutdown drama, and geopolitical turmoil.

Today, inflation across the developed world has since more than halved, all while growth has remained resilient. That strong pace stands to fade, but the recession everyone feared never came (at least, it hasn’t come yet). This backdrop teed up the Fed to message a pivot in its final policy meeting of 2023. 

Fed policymakers now say further rate hikes don’t appear likely. And, while we shouldn’t expect rate cuts right away, they are coming. 

As markets recalibrate to reflect these changes, the consensus view sees a positive outlook for markets in 2024. According to most experts:

• Inflation will likely settle: Price pressures are abating, and the Fed’s own forecasts show a durable path toward its 2 percent inflation target.
• The cash conundrum: With the Fed likely done tightening and perhaps on the verge of cutting rates, juicy yields on cash stand to fall – perhaps fast.
• Bonds are more competitive: Falling rates would also mean that one might consider locking in still-elevated bond yields. 
• Most are constructive on stocks: A soft landing – marked by moderate inflation, solid growth, and easier policy – should be a sweet spot for stocks. If the data continues to turn out even better than we expect, valuations could have some more room to expand, and earnings could even grow a bit further.
• Contained credit stress: Avoiding a recession means that credit stress should be more limited to areas such as commercial real estate and select pockets of corporate debt. 

There are a variety of reasons for being constructive on stocks. Inflation has been cooling, and the Federal Reserve has been less hawkish. Economic growth has been resilient fueled by robust consumer spending. Sentiment has been improving. And so on.

The absolute levels of most metrics suggest the economy remains generally strong – seeming confirmation of the consensus bullish “Goldilocks” soft landing scenario whereby inflation cools to manageable levels without the economy having to sink into recession.

The simplest explanation for being constructive on the market is that the outlook for corporate earnings growth is positive, and earnings are the most important long-term driver of stock prices. Most analysts are looking for double-digit earnings growth in both 2024 and 2025. According to FactSet, analysts expect S&P 500 earnings per share to grow 10 percent year-over-year to $244 in 2024 and 12 percent to $275 in 2025.

U.S. equities are priced at approximately 20 times earnings, which is about one-third more expensive than the historical average of about 15 times earnings. Because the financial markets anticipate earnings growth of about 12 percent in 2024, I would expect equity investors to be willing to pay above-average valuations in anticipation of above-average growth. My base case for 2024 is optimistic.

Much could go wrong, as always. Interest rates staying higher for longer could depress earnings, for example. The long-awaited recession could arrive now that we least expect it. And so on. Moreover, there will be surprises.

Still, the U.S. stock market is a call option on American ingenuity, innovation, and human resiliency. And it’s dangerous to bet against America.

Therefore, the game is on among money managers chasing the record level of assets in money market funds. The last time the Fed lowered interest rates pre-emptively (in 2019), the S&P 500 rallied about 30 percent and investment grade bonds returned nearly 9 percent that year. Looking at soft landings even more broadly, the S&P 500 typically rallies by roughly 15 percent on average in the 12 months after the first cut (going back to 1965).

This year looks promising. That said, looks can be deceiving. Plus, we humans are terrible at forecasting future events.

Forecasting Follies

Despite our lack of talent at it, we humans are obsessed with prediction. As the mathematician Alfred Cowles observed decades ago, people “want to believe that somebody really knows.”

Nobody does.

That’s why, every year, the examples of poor forecasts and predictions are legion. The economy, the markets, and the world-at-large provide unlimited fodder for them.

As John Kenneth Galbraith succinctly (and correctly) stated, “There are two kinds of forecasters: those who don’t know, and those who don’t know they don’t know.” Stock market forecasts reestablish this truth year after year.

Every December, Wall Street denizens saddle-up and produce seemingly earnest, highly specific forecasts for where the S&P 500 will be at the end of the next calendar year. However, the price of something is discovered by what someone else is willing to pay for it and not by some intrinsic value or by some declaration of expectation. What someone else is willing to pay for it is based on what they believe – about the past, present, and future. Beyond the present lies imagination. And lots of surprises. That’s why the markets are much more of a mind game than a math game. And that’s why markets will always be exceedingly hard, even when the math seems easy or the future seems certain. 

The CXO Advisory Group set out to determine whether alleged stock market “experts” provide useful insight. To find the answer, CXO collected and investigated 6,584 forecasts from 2005-2012 for the U.S. stock market offered publicly by 68 supposed gurus with a wide variety of styles and predilections. They found that their accuracy was worse than a coin-flip: just under 47 percent. A similar academic study from 2018 found roughly 48 percent accuracy. This 2023 academic study of survey forecasts got similar results.

On average, the median Wall Street forecast from 2000 through 2023 missed its target by an astonishing 13.8 percentage points annually. That’s more than double the actual average annual performance of the stock market over that period.

In December of 1994, Orange County, California, filed for bankruptcy protection after Robert Citron, its chief investment officer, lost billions of dollars speculating on fixed income derivatives. He bet big that interest rates would not rise, but they did anyway. When asked (long before the bankruptcy) why this wasn’t risky, Citron intoned, “I am one of the largest investors in America. I know these things.”

He didn’t.

Predicting market performance is much more a matter of luck than skill.

Truth be told, bad forecasting is utterly human and, perhaps more dangerously (as my friend Jason Zweig continues to demonstrate), we misremember our forecasts (and our market performance) – thinking they were a lot better than they were.

Nobody can know what’s going to happen. It’s physics’ three-body problem applied to the global economy’s trillions of inputs. There are far too many variables for forecasting to be a viable endeavor. We ought to be highly skeptical (or worse) of any prediction made about complex systems.

As my friend Morgan Housel has explained, “Every forecast takes a number from today and multiplies it by a story about tomorrow.” We might have good current data, but “the story we multiply it by is driven by what you want to believe will happen” and what you’ve decided makes the most sense. Usually, the best story wins, correlation to reality not required.

Nobel laureate Daniel Kahneman, the world’s leading authority on human error, highlights the “illusion of understanding” – our predisposition to concoct stories from the information we have on hand. “The core of the illusion is that we believe we understand the past, which implies that the future should also be knowable.”

It isn’t.

Moreover, history is driven by surprising events while forecasting is driven by predictable ones. Let the great Peter Bernstein explain more precisely (Peter L. Bernstein, “Forecasting: Fables, Failures, and Futures – Continued,” in Economics and Portfolio Strategy, November 15, 2002, p. 5).

“The very idea that a forecaster can spin a bunch of outcomes whose probabilities add up to 100 percent is a kind of hubris. Risk means that more things can happen than will happen, which in turn means that the scenarios we spin will never add up to 100 percent of the future possibilities except as a matter of luck. Like it or not, the unimaginable outcomes are the ones that make the biggest spread between expected asset returns and the actual result.”

As Jason Zweig put it, “The only true certainty is surprise.” Or, as Morgan Housel wrote in his new book, Same As Ever, there is a very good reason we suffer this weakness. “We are very good at predicting the future, except for the surprises – which tend to be all that matter.”

“No matter how much we may be capable of learning from the past,” Hannah Arendt wrote, “it will not enable us to know the future.”

In practical terms, per Kahneman, “The world is incomprehensible. It’s not the fault of the pundits. It’s the fault of the world. It’s just too complicated to predict. It’s too complicated, and luck plays an enormously important role.” 

It was the Nobel Prize-winning physicist Niels Bohr, or Hall of Fame New York Yankees catcher Yogi Berra or, perhaps, neither one of them, who coined the phrase: “Predictions are hard to make, especially about the future.” Whoever it was, he or she was right.

But many are going to try anyway, which is what makes this endeavor so much fun each year. If you doubt the (obvious) conclusion that humans are truly dreadful at predicting the future, or merely want to have a laugh at human silliness, we have plenty of evidence to examine. And examine it we shall.

Pretty much everybody in Washington and on Wall Street got 2022 badly, absurdly wrong – from the Fed’s insistence that inflation would be transitory to the Wall Street analysts who projected a solid year of gains for stock and bond markets. Instead, the S&P 500 lost 18 percent, inflation climbed to a four-decade high, nearly tripling the Federal Reserve’s full-year forecast, and bonds had their worst year ever.

As 2023 dawned, these same “experts” were determined not to make the same mistake again. Or maybe they were fighting the last war. Either way, they overwhelmingly called for more doom and gloom, being remarkably astute at analyzing what had already happened.

The S&P 500 gained 26.06 percent in 2023.

Current trends are not permanent trends.

The average forecast of handicappers tracked by Bloomberg called for a decline in the S&P 500 in 2023, the first time the aggregate prediction was negative since at least 1999. Such negativity is highly unusual since the firms offering these outlooks are in the business of selling securities. Perhaps worse (in terms of prediction), the variance was immense, from down 17 percent to up 10 percent.

For example, Morgan Stanley’s Mike Wilson, picked by institutional investors as Wall Street’s best strategist, thought the bear market would continue, and the S&P 500 would fall hard before finishing 2023 at 3,900, pretty much where it began. At Bank of America, rate strategist Meghan Swiber was telling clients to prepare for a plunge in U.S. Treasury bond and note yields to forge a huge rally (she wasn’t alone). And, at Goldman Sachs (as at JPMorganChase and elsewhere), strategist Kamakshya Trivedi was pitching Chinese assets because he thought the economy there would finally roar back from Covid-19 lockdowns. Together, these three forecasts became, in essence, the consensus view.

They were wrong, wrong, and wrong.

The buy-side, while less bombastic, wasn’t much better than the sell-side.

In December 2022, Marko Kolanovic, the JPMorganChase strategist who had insisted through much of that year that stocks were on the cusp of a rebound, capitulated and turned bearish, just in time for the rally.

Chris Senyek, chief investment strategist at Wolfe Research, called for the U.S. economy to crater (to -3 percent GDP), with inflation remaining stubbornly persistent, leading to “stagflation,” and a market collapse of 35 percent. He only missed it by 60 percentage points.

In May, with the S&P up nearly 10 percent on the year, Morgan Stanley’s Wilson – the public face of the bears – doubled down on his negativity, urging investors not to be duped: “This is what bear markets do: they’re designed to fool you, confuse you, make you do things you don’t want to do.” At least he got that right. Sort of. By year-end, he was ducking interviews.

Goldman Sachs called for double-digit gains in China while Morgan Stanley turned overweight on Chinese stocks in December 2022 and, as noted above, were far from alone, as most expected the world’s second-largest economy would get a lift as the government relaxed Covid-19 restrictions. But the reopening revival failed to materialize. Stocks are nowhere near pre-pandemic levels, and China’s property debt crisis swallowed even more companies. The MSCI All-World Index gained over 22 percent in 2023. The MSCI China Index lost 11.2 percent.

The once “Bond King,” Bill Gross, continued his quest to return to relevance by hating the market. He might have more success were he right. Or close. But the current “Bond King,” Jeff Gundlach, didn’t get it right, either.

Hedge fund exposure to technology stocks hovered near multiyear lows last January when the fantastic artificial intelligence trade took flight. They were shut out from just the sort of historically lucrative trade that they are paid to capture.

During the best week for stocks of 2024, and a tremendous year it was, the Barron’sBig Money poll showed only 12 percent of those surveyed were bullish. Meanwhile, during that same week, Goldman Sachs data showed hedge funds were the least net long U.S. equities in 11 years.

Halfway through 2023, Liz Ann Sonders of Schwab called for a flat second half due to a “rolling recession.” The S&P 500 gained over 7.5 percent in the second half of the year. Her fixed income counterpart, Kathy Jones, saw 10-year U.S. Treasury note yields approaching 3 percent. UBS went even further, calling for U.S. 10-year yields to drop to as low as 2.65 percent by the end of the year. The 10-year U.S. Treasury note ended 2023 yielding 3.86 percent, just about where it began the year.

Bob Doll called for recession, a flat market, value to beat growth, and for active managers and international stocks to outperform. He was oh-for-five.

Many strategists, economists, and other analysts also kept calling for a Fed pivot that hasn’t yet arrived.

When Sam Bankman-Fried was at Jane Street Capital (before he became famous for FTX and convicted of fraud), he built a system to get the 2016 U.S. Presidential election results before any media outlet could broadcast them. It worked, and the Jane Street team knew Donald Trump had shocked the world and defeated Hillary Clinton before anyone else. But they still managed to lose money – a ton of money ($300 million!) – on the trade because they bet against U.S. markets into a big post-election rally.

Even were we to get the forecast right, we’d likely make the wrong trade.

For example, if, say five years ago, you knew that there would be a global pandemic and that Pfizer would be the leading manufacturer of a vaccine to deal with the virus that would generate sales of over $70 billion in 2021-22, I’m guessing you’d eagerly bet that Pfizer would outperform the market.

We have trouble forecasting even 30 seconds into the future.

Michael Burry got rich by being right once in a row. He called the 2008-09 financial crisis but has kept calling for replays and kept being wrong.

As always, Jeremy Grantham, like Harry Dent, Gary Shilling, Greg Jensen, and John Hussman, predicted a crash (when they are – eventually, maybe even later today – right, I predict none of them will remind us of the dozens of times they were wrong). Not to be outdone, Stansbury Research said stocks would fall much further in 2023 and, like Japan, may not recover in our lifetimes. If that weren’t enough, Rod Dreher kept calling for imminent societal collapse. So did Ron Paul. What’s the number of predicted collapses before “imminent” has no meaning?

Last January, Wells Fargo analysts labeled the already sunken stock price of Silicon Valley Bank as the “deal of the century.” Barely six weeks later, the bank failed.

As he so often does, Warren Buffett got this right, too: “Forming macro opinions or listening to the macro or market predictions of others is a waste of time. Indeed, it is dangerous, because it may blur your vision of the facts that are truly important.”

In response to the failings of market strategists, economists said, “Hold my beer.”

Anna Wong is chief U.S. economist for Bloomberg Economics. In October of 2022, her model of the U.S. economy showed a 100 percent chance of a recession happening in 2023. Not 95. Not 98. Not even 99. 100 percent! No hedging. No margin for error. At least so far, the inevitable recession hasn’t arrived. The model was still reading 100 percent in June, when Bloomberg quietly stopped publishing the data.

Broadly speaking, in 2021, economists wrongly expected inflation to prove “transitory.” In 2022, they underestimated inflation’s staying power. They came into 2023 predicting that the Federal Reserve’s rate increases, meant to cure inflation, would plunge the economy into a recession.

All wrong.

In the 4th quarter of 2022, a survey of more than sixty economic forecasters from universities, businesses, and Wall Street provided a consensus view. The United States was “forecast to enter a recession in the coming 12 months as the Federal Reserve battles to bring down persistently high inflation, the economy contracts and employers cut jobs in response.” Moreover, the surveyed economists expected inflation-adjusted GDP “to contract at a 0.2 percent annual rate in the first quarter of 2023 and shrink 0.1 percent in the second quarter.” They also predicted that the unemployment rate, which was then 3.5 percent, would rise to 4.3 percent by June.

Nopity, nope, nope, nope. 

Among other errors, economists badly underestimated inflation, underestimated consumer spending, and underestimated the strength of the labor market.

As they saw it, barely 12 months ago, recession was pretty much inevitable and the outlook for stocks wasn’t much better. They cited any number of red flags: war in Europe; the Fed was still raising interest rates; the yield curve was inverted; Americans were spending down their pandemic savings; the housing market was in decline; America’s leading economic indicators has fallen for nine months in a row; and banks were tightening their lending standards.

“We expect a downturn in global GDP growth in 2023, led by recessions in both the U.S. and the eurozone,” BNP Paribas wrote in the bank’s (representative) 2023 outlook, titled “Steering into Recession.”

The economy and the markets took those red flags and started a parade.

As Bloomberg reported, Barclays Capital said 2023 would go down as one of the worst for the world economy in four decades. Ned Davis Research put the odds of a severe global downturn at 65 percent. Fidelity International reckoned a hard landing was unavoidable.

It seemed like everybody thought so.

To be sure, recession expectations seemed historically aligned.

Even the relatively few relatively optimistic analysts predicted the U.S. economy would grow much more slowly than it has over the past 20 years. They projected growth for 2023 would slow to about 0.5 percent, on average. Goldman Sachs had the rosiest outlook, projecting 1 percent growth in U.S. gross domestic product. 

The Fed did keep raising interest rates – at the fastest clip since the 1980s, a regional banking crisis felled Silicon Valley Bank and other regional banks, and war broke out in the Middle East while continuing in Ukraine.

Still, the economy, like the market, kept advancing. As of this writing, the most recent data show a robust 3.3 percent GDP growth. Analysts of all stripes got the gloom and doom wrong and missed on the boom entirely.

The Brookings Papers on Economic Activity claims to be America’s leading forum for relating academic research to “the most urgent economic challenges of the day.” The lead presentation at the September 2022 conference was a paper on inflation. Its conclusions were dismal. Harvard’s Jason Furman, one of the assigned discussants, called it “the scariest economics paper of 2022,” because it suggested that to get inflation down to 2 percent “we may need to tolerate unemployment of 6.5 percent for two years,” a view which garnered little dissent. However, the unemployment rate remained exceedingly low and is just 3.7 percent today.

In November 2022, The Economist published a piece entitled, “Why a global recession is inevitable in 2023.” It wasn’t.

Mohammed El-Erian is a respected economic sage, with a prestigious academic post at Cambridge University and a senior advisory position at the international financial firm Allianz. On October 5, he warned that the Federal Reserve’s commitment to keeping interest rates high to quell inflation would sap the U.S. economy and thus diminish the likelihood of a “soft landing.” The Fed’s policy, he wrote, “compounds the erosion in financial, human and institutional resilience.” Just two days later, the Labor Department announced that the U.S. economy had gained 336,000 jobs in September.

Bridgewater’s Ray Dalio predicted recession. David Rosenberg is still predicting one, as he has since early 2022. JPMorganChase CEO Jamie Dimon worried that the erosion of consumers’ pandemic savings by price growth “may very well derail the economy and cause a mild or hard recession.”

I could go on-and-on … and maybe have already.

In October 2022, supposed “top economists” were “unanimous” in predicting interest rates would be “higher for longer” (today, it’s “lower and sooner”). Interest rates topped out the very next day.  

Nobody has more and better data than the Federal Reserve. How accurate have the Fed’s projections been historically?

Not very. Academics and others confirm it (see here, here, here, here, and here). The Fed itself does, too.

For example, note the following September 2021 forecasts when CPI was already above 5 percent. Back then, the Fed was forecasting rate hikes to only 1 percent by the end of 2023, with inflation coming right back down to 2 percent, inflation they called “transitory.”

Oops.

Instead, we got the highest inflation rate in the U.S. since the early 1980s (over 9 percent CPI) and a Fed Funds Rate above 5 percent. So, even when higher inflation was staring them right in the face, the Fed experts didn’t see it coming. Which is why you probably shouldn’t put much weight on their current forecasts (or anybody else’s, for that matter). They can’t predict the future any better than anyone else, even when it comes to their own policy rates, and despite their huge information advantage.

After going up more than he expected, Atlanta Fed President Raphael Bostic now says inflation has come down more than he expected.

As Fed Chair Jerome Powell candidly put it, “we are navigating by the stars under cloudy skies.”

At best.

We will never act with perfect foresight. We will rarely act with decent foresight. Living with uncertainty, after all, “remains the essence of the human condition.” We will always have to navigate challenging and changing conditions, relying on experience, training, instinct, and imperfect assumptions, prone to our old familiar flaws (chiefly, “our never-failing propensity to discount the future”). 

This may not be an inspiring conclusion, but it is how the world works. Inexorably.

Fear Not

I was recently asked about Harry Dent and his apocalyptic forecast for the market. I replied, “Which one?” 

Dent called for “the collapse of our lifetime” – an 86 percent loss for the S&P 500; 86 percent on the Russell 2000; 92 percent on the Nasdaq – by June 2023. That didn’t happen, obviously, so now he says it’s coming in 2024.

He’s a compelling speaker who exudes impressive confidence, especially considering his history.

In 1999, just before the Great Financial Crisis and a huge market drop, he wrote The Roaring 2000s: Building the Wealth and Lifestyle You Desire in the Greatest Boom in History. Dent predicted that the stock market would experience a huge boom during the first decade of the new century, reaching 35,000 on the Dow. The DJIA closed 1999 at 11,497 and 2009 at 10,428. So, he missed it by a mile. The DJIA did reach 35,000 in June 2021, but Dent had long been a permabear by then.

In The Next Great Bubble Boom: How to Profit from the Greatest Boom in History: 2006-2010, published in January 2006, Dent doubled down on his earlier predictions for the 2000s and called for big gains through the rest of the decade. He missed that one, too.



In late 2008, Dent published another book, The Great Depression Ahead: How to Prosper in the Crash Following the Greatest Boom in History, moving into the “doom and gloom” business. Bad move. At the GFC bottom, March 9, 2009, the Dow traded at 6,547. It closed 2023 at 37,689.40 and has moved even higher since.

In December of 2016, Dent went on CNBC to insist the Dow would “end up between 3,000 and 5,000 a couple years from now.” The Dow closed at 23,327 a couple of years later – the end of 2018 – and has not dropped below 19,000 since the prediction. 

In June 2017, Dent predicted a “once in a lifetime” crash in the stock market, the economy, and in real estate over the following three years. Dent got a big market decline in 2020, but because of Covid, not for any of the reasons he cited. Moreover, by the end of that year, the decline (and more) had been recovered.

In March 2021, Dent called for a nearly 50 percent drop in the S&P 500 by June. Didn’t happen. In July 2021, he followed up with a prediction that equities would drop by 80 percent in the fall, which didn’t happen, either.

In late August 2022, he claimed that “[t]he biggest crash of our lifetime is in progress.” It wasn’t. In November, he pushed it back to early 2022. Also, wrong. Which returns us to his most recent apocalyptic visions.

“Fear sells. Fear makes money. The countless companies and consultants in the business of protecting the fearful from whatever they may fear know it only too well. The more fear, the better the sales.”

That short summary, from The Science of Fear, by Dan Gardner, is perfect. Gardner goes on to recount how post-9.11 fear dramatically reduced air travel and led to many, many more driving trips. However, if a 9.11 impact attack had happened every single day for a year, the odds that you’d be killed by such an attack would be one in 7,750, still greater than the actual odds of dying in a traffic accident, which are one in 6,498. Gerd Gigerenzer estimates that the increase in automobile travel in the year after 9.11 resulted in 1,595 more traffic fatalities than would have otherwise occurred.

To cite a recent example, on January 5, 2024, the day a door plug flew off an Alaska Airlines plane mid-flight and freaked everybody out – 120 Americans died in motor vehicle crashes. Roughly 136 died from opioids. Perhaps 150 died as hospital inpatients due to preventable medical errors. About 230 died of COVID-19, and zero died in aircraft accidents.

If you want to make a sale, find a bogeyman (human or otherwise), and explain why your marks should be terrified of him, tell them who or what is to blame for the bogeyman’s offenses and offer a purported remedy. Harry Dent, come on down.

I shouldn’t have to add that the alleged remedy usually costs. A lot.

Investors face fear every day, although more so on some days than others (nobody complains about volatility to the upside), and don’t often face it very effectively. Markets are driven by narratives more than they are driven by data, which makes us especially susceptible fearmongering. To quote Jason Zweig paraphrasing Mike Tyson, “investors always have a plan until the market punches them in the face.”

Real fear comes with names, faces, and a story. And oh how we want deliverance from our fears. As Morgan Housel has cautioned: “The business model of the majority of financial services companies relies on exploiting the fears, emotions, and lack of intelligence of customers. The worst part is that the majority of customers will never realize this.”

Remember what Barton Biggs, Morgan Stanley’s former strategist, said: “Bullish and wrong and clients are angry; bearish and wrong and they fire you.” Dent exemplifies the wisdom of legendary investor Peter Lynch, “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”

Dent is hardly the only permabear, of course. Plenty of people try to trade on our fears.

Former Reagan White House Budget Director David Stockman has predicted market crashes in 2012, 2013, 2014, 2015, 2016, 2017, 2018, 2019, 2020, 2021, 2022, and 2023. Other doomers include Jeremy Grantham, Michael Burry, Gary Shilling, Greg Jensen, Nouriel Roubini (“Dr. Doom”), Peter Schiff, Stephen Roach, and David Tice.

As noted, when they are – eventually, maybe even later today – right, I predict none of them will remind us of the dozens and dozens of times they were wrong.

Permabears exist despite the upward trend of the markets because these alleged oracles garner clicks, eyeballs, attention, television appearances, and assets. It pays.

We respond emotionally to stories. Moreover, fear is the most motivating of emotions, at least in the short-term. As Jeremy Siegel has explained, “Fear has a greater grasp on human action than does the impressive weight of historical evidence.” Warren Buffett has made enormous amounts of money by following the evidence and buying stocks, which have provided consistently high returns on a consistently inconsistent basis for decades: “In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.” Buffett buys stocks and holds them. His “favorite holding period is forever.” The typical investor … not so much.

Even the atypical investor struggles in this regard. As Morgan Housel says, “Every past decline looks like an opportunity, every future decline looks like a risk.” Harry Markowitz won the Nobel Prize for exploring the mathematical tradeoff between risk and return. Some years ago, my friend, Jason Zweig, asked him how, given his work, he structured his own portfolio. He replied as follows. 

“I visualized my grief if the stock market went way up and I wasn’t in it – or if it went way down and I was completely in it. My intention was to minimize my future regret. So I split my contributions 50/50 between bonds and equities.”

That may have been a perfectly appropriate asset allocation for Professor Markowitz, of course, but his thinking was far more fear-based than analytically driven.

As Duke Hall of Fame basketball coach Mike Krzyzewski adds, “Winners hate losing more than [they love] winning.” Per Daniel Kahneman, “the main contribution that Amos Tversky and I made during the study of decision making is a sort of trivial concept, which is that losses loom larger than gains. …As a very rough guideline, if you think two to one, you will be fairly close to the mark in many contexts.”

We are slaves to our past experiences: “Current beliefs depend on the realizations experienced in the past” such that we fear what hurt us before and thus fight the last war (so to speak). Per Kahneman again, “Loss aversion is emotional, the reluctance is emotional, and if I’m making a decision on behalf of somebody else, I don’t feel that emotion, which means, by the way, that advisors are likely to be more rational in the long run because loss aversion is costly.”

FOMO is real too. Accordingly, performance-chasing is widespread, among both retail and institutional investors. Therefore, investor returns significantly trail investment returns.

As Andre Agassi explained, “A win doesn’t feel as good as a loss feels bad, and the good feeling doesn’t last as long as the bad. Not even close.” Or David Letterman: “Maybe life is the hard way, I don’t know. When the show was great, it was never as enjoyable as the misery of the show being bad. Is that human nature?”

Yes. Yes, it is.

When the markets are roiling, and even when they are not, fear is pitched all day, every day, and human nature buys it. It pays a premium, too. A very big premium.

Giving in to the fear we feel is dangerous business, of course, because the market trends solidly upward.

On the other hand, you can always find reasons to be terrified and cash out of the market if you choose to look.

Doing so comes with a crazy-high degree of difficulty. Obviously, market-timing successfully means making multiple immensely difficult and complex decisions and being consistently right. Does that seem like a reasonable expectation to you?

If you don’t want to invest in equities because you fear a market crash, then you shouldn’t be in equities. However, you must also recognize that, if you avoid stocks, you will almost certainly have a lot less money and, the longer you live, the difference between what you have and what you could have had will compound ... a lot.

All of which raises what is likely the crucial question: Are you a long-term investor?

Truly being a long-term investor is difficult because the long-term feels like an eternity in the moment. As Kahneman has explained, “the long-term is not where life is lived.”



Wall Street’s business model is designed to get you to put your money in motion even though time is the one true advantage investors have in the market.

To be clear, none of this is cast in stone. Just because something has always worked doesn’t mean it always will. The worst that has ever happened isn’t a limit on what can happen. Things can always get worse. Past performance is not indicative of future results. If you doubt me, ask Japanese investors how “stocks for the long run” has performed for them, or ask risk managers how VaR worked for them during the GFC.

It should also be noted that the permabears could (finally) be right today. A market crash might be imminent.

But that’s not the way any of us who are long-term investors should bet. The probabilities favor investment, especially for long-term investors. By a lot. Our brains all echo with fearful thoughts, whispers, and imprecations. For most of us, most of the time, we’d do well to ignore them about our investment choices. Instead, we should listen to the Christmas angel, even though Christmas is over, and “fear not.”

In the near term, markets act as a voting machine, subject to the emotions, whims, and headlines of the moment. Over longer periods, markets act as a weighing machine, separating reality from fantasy. Ultimately, reality wins.

Until that happens, it’s wise to stay focused on your plans and goals. 

Why an Outlook at all? 

We may be lousy at investment forecasts (and we are), but the idea that we can live our investing lives forecast-free is as erroneous as the market predictions that are so easy to mock. As Cullen Roche emphasizes, “any decision about the future involves an implicit forecast about future outcomes.” As Philip Tetlock wrote: “We are all forecasters. When we think about changing jobs, getting married, buying a home, making an investment, launching a product, or retiring, we decide based on how we expect the future to unfold.”

It's a grand conundrum for the world of finance. We desperately need to make forecasts to succeed but we are remarkably poor at doing so. What should we do with that knowledge? Why an Outlook at all?

There are three primary reasons. The first is that doing so is interesting and fun. It forces serious consideration of what has gone on and what's going on. That is a valuable exercise. The role of a financial advisor is less to predict the future and more to see the present clearly.

Secondly, longer-term outlooks (and especially those based upon appropriate valuation measures) do have a history of very rough accuracy. We can have almost no idea of what will happen in the near-term while still having a pretty good idea of what investment prospects and returns should look like over the next 5-10 years. 

Finally, a good Outlook can remind us where we are and highlight the trends and possibilities we are most likely to face going forward. As Howard Marks puts it, “while we never know where we’re going, we ought to know where we are.” There are so many variables and “unknown unknowns,” to use Donald Rumsfeld's famous phrase, that we will necessarily be wrong a lot. Nobody can offer Truth with a capital “T.” But it is possible to be helpful. It's a modest but important goal.

What’s Could Go Wrong?

As noted, 2023 was excellent indeed and 2024 looks promising. However, I’m thinking about – worrying about – a variety of dangerous things in our world that could change that outlook. In 2023, many bad things happened, but nothing derailed the market’s performance. In general, as in 2023, the market is resilient enough to overcome bad things.

But not always.

Moreover, it’s the things we don’t expect that disrupt things, at least historically. That’s why forecasting is so difficult. Here are three big things I’m worried about in 2024 – things that could upend, or at least damage, the market applecart. That may not be a problem, but they could be.

War. The year 2023 saw the greatest global resurgence of armed conflict since 1945. There is every reason to fear 2024 will be worse. We are living, if not through a World War, then a world at war, the great post-globalization jostling to divide up the spoils of what was once America’s unipolar imperium.

Today, rivals to American hegemony are not challenging the superpower directly. Not yet at least. Instead, America is being challenged obliquely, as its rivals nibble at the edges of empire, targeting weaker client states in the confidence that the United States now possesses neither the logistical capacity, the domestic stability, not the political will to impose its order on the world. 

I fear that an overriding theme of 2024 may be imperial overstretch precipitating a retreat from global dominance. From the Red Sea to the Donbas, the jungles of South America to the Far East, America’s security establishment finds itself struggling to contain local blazes that threaten to become a great conflagration.

The battle lines in Ukraine have barely moved over the past year, but expectations for the war’s outcome have reversed. A year ago, the consensus view was that the Russian invasion was already a strategic defeat for Putin. His armies had proved unexpectedly ineffective on the battlefield and had crumbled before Ukraine’s rapid autumn 2022 northeastern counteroffensive. 

Simultaneously, rather than breaking apart through its internal divisions, the NATO alliance found a new sense of purpose, consolidating itself against the Russian threat and devoting vast quantities of already-existing and soon-to-be-produced materiel towards military victory. That mood of triumphalism has already passed. 

The promised war-winning Western increase in munitions production simply has not materialized (so far, at least), while Russia’s transition to a war economy, and its seizing of Western companies in response to a sanctions regime whose effects have proved the opposite to those intended, have granted Russia both renewed offensive potential and an economic boom to pay for it. This winter is a bleak one for Ukraine, and the rest of 2024 is not promising, either.

An emboldened and invigorated Russia is not likely to be good for American interests and holds a variety of market risks, too.

Meanwhile, the Middle East remains the world’s powder keg. And it is at war.

Although Israel is both diplomatically and militarily dependent on the United States, that relationship is not reflected in Israeli President Netanyahu’s (entirely understandable) prosecution of the war in Gaza. Even as American planners fret over the erosion of their precious munitions stockpiles by the Ukraine war, Israel is also burning through U.S.-donated supplies. 

Iran and its surrogates, together with Yemen, provide additional threats and risks. As a result of poor procurement decisions, the U.S. Navy is struggling to marshal the resources necessary to keep trade routes open, the basic function of a global empire. Balking at fighting Hezbollah or the Houthis directly, the prospect of a U.S. attack on Iran, deemed an over-ambitious goal even at the height of American power, is unlikely in the extreme, which in turn feeds Tehran’s appetite for risk. Overstretched, wearing down its ships through over-deployment, and suddenly showing itself dependent on weaker, unenthused European allies to make up the numbers, in the Red Sea we are shown a glimpse of America’s naval performance in a future Pacific conflict: the results will be heartening to China.

Speaking of China, while there hasn’t been any shooting (so far), we face an increasingly belligerent adversary. Waiting patiently to obtain and assert global leadership, the optimum time for China to take the initiative will likely be at the moment of America’s greatest distraction by internal disorder: perhaps this election season will present an opportunity too rare to pass up, accelerating its timetable to seize Taiwan.

Taiwan produces over 60 percent of the world’s semiconductors and over 90 percent of the most advanced ones and about one-third of global equity market cap relies on TSMC silicon. 

Moreover, China is facing a catastrophic demographic/deflation bust on its current course. A global power struggle would distract the people of China from their problems at home, raising the risk profile dramatically.

The expected good news of economic recovery in China didn’t materialize in 2023, even though the end of zero-Covid should have lifted consumer spirits, while the unexpected bad news of political uncertainty kept cropping up, though the previous year’s party congress should have consolidated regime stability.

China may have hit its GDP growth target of 5 percent in 2023 (if you believe Chinese government data), but its main stock index suffered big losses (-17 percent) in 2023. More perplexing were the politics, as 2023 was a year of disappearing ministers, disappearing generals, disappearing entrepreneurs, disappearing economic data, and disappearing business for the firms that have counted on blistering economic growth. Distraction may be attractive to the CCP.

In our own hemisphere, Venezuela has deployed additional military forces and equipment close to its border with Guyana, according to recent satellite images. The move escalates the risk of war between the two countries over Essequibo, a disputed region claimed by Venezuela but administered by Guyana, and oil-rich waters off Essequibo’s coast.

Until the U.S. can increase its munitions production and replenish its arsenal, which may take years, every shell fired on Gaza or in eastern Ukraine weakens America’s deterrent power. Our available military resources are becoming increasingly unequal to our global commitments. This shortfall presents America’s rivals with a rare and unexpected window to challenge the superpower directly, in the knowledge that it will struggle to fight a high-intensity war of any great duration.

The world is living through its most dangerous moment in many decades, and the logic of events, in every theatre, seems to lead toward further escalation over the year to come. In 2024, America’s fraught domestic interregnum (see below) may create a feedback loop with the already bloody global interregnum for the spoils of its empire. Needless to say, that wouldn’t be good for markets.

Elections. Throughout American history, the looming transfer of power via elections happened smoothly. Continuity in maintaining the empire’s strategic goals with stability for domestic policy and markets was routine. No such continuity can be expected in 2024, irrespective of the outcome. America’s previous two elections were marked by the most serious waves of civil disorder and political instability in decades as each party and their factions within the state bureaucracy contested the other’s legitimacy, each deploying excitable civilians radicalized by their respective lawfare initiatives as proxy weapons.

Throughout 2024, America will likely be roiled by its internal political dysfunction in a way we have never yet seen, and the rest of the world will live in the shadow cast by the contested imperial throne.



The U.S. Presidential Election is not until November, yet it is already dominating the national discourse. Elections aren’t just here at home, however. Countries with nearly half of the world’s population (and about 70 percent of the most populous countries) will go to the polls this year. That has never happened before. That provides plenty of opportunity for upheaval and unrest.

Historically, U.S. presidential election years have been quite good for the market. I hope it will be true again. 

But there are reasons why 2024 could be different.

To start off, the two major candidates – I’m assuming both President Biden and former President Trump will be nominated by their respective parties – are old and widely despised. In November, Mr. Biden will be 82 and he is already the oldest president in American history. If Mr. Trump is returned to the White House, he would become the oldest president in history before the end of his term. 

Shockingly, 86 percent of Americans think President Biden is too old to serve another term while 62 percent think former President Trump is too old. Most interestingly, 59 percent think both Mr. Biden and Mr. Trump are too old to be president.

Moreover, a clear majority of the public dislikes each candidate immensely (there’s a surprising amount of overlap – see here and here). Each side thinks the other guy is manifestly unfit for office. Our deep polarization accounts for only some of this animus. The campaign is going to be ugly. 



Even worse, huge numbers of the public insist they will refuse to accept the election’s outcome if their guy doesn’t win. This important study shows that people’s optimism toward both the financial markets and the economy is dynamically influenced by their political affiliation and the existing political climate. Uh-oh.

Add to this volatile concoction the likelihood of massive disinformation campaigns enhanced by artificial intelligence and the makings of an unusually disruptive and dangerous geopolitical event will be in place. And, sadly, this year of political turmoil is unlikely to be a uniquely American phenomenon.

Debt and Deficits. In just the last dozen years, the U.S. national debt has more than doubled to $34 trillion, and there appears to be no appetite in either political party to do anything about it. This fiscal trajectory, as made painfully clear in the recent Congressional Budget Office 10-year budget and economic outlook, could soon begin imposing the economic costs about which the the deficit hawks of yesteryear warned.  



Though $34 trillion is an enormous sum, the more relevant number is publicly held debt – the portion of the debt excluding intragovernmental debt, or the money the government owes itself – which stands at $27 trillion. The CBO projects that between 2024 and 2034, public debt will balloon to $48 trillion and the annual budget deficit will grow from $1.6 trillion to $2.6 trillion. (In fiscal year 2019, the deficit was “just” $984 billion.) 

(via the Congressional Budget Office)

According to the CBO, the deficit as a percentage of GDP will grow to 6.1 percent in 2025 – a figure that, since the Great Depression, has only been exceeded during times of crisis: “during and shortly after World War II, the 2007–2009 financial crisis, and the corona­virus pandemic.” By 2034, public debt will reflect a larger portion of the economy, 116 percent of GDP, than at any point in American history, leapfrogging the record high of 106 percent during World War II. Extending the projections out an additional 20 years shows that the debt-to-GDP ratio would be 172 percent in 2054.

Rising interest rates have contributed to the sharp increase in the deficit and the cost of servicing the debt. “Net interest costs are a major contributor to the deficit, and their growth is equal to about three-quarters of the increase in the deficit from 2024 to 2034,” CBO Director Phillip Swagel said in a recent statement. This fiscal year, interest costs will be higher than discretionary defense spending, and in 2025, interest costs are expected to exceed what the government will spend on total non-defense discretionary spending.

Every percentage point that interest rates go higher adds about $2.8 trillion over a decade and $30 trillion over 30 years in interest costs. That’s the equivalent of adding an additional Defense Department. That’s just for one percentage point.

This shift in the conversation about debt and deficits comes as leaders in both political parties appear committed to not addressing the biggest debt drivers – namely, entitlement spending and tax cuts.

What are the actual consequences of such increases to the debt and deficit? The long-term risk is a fiscal crisis in which the deficit becomes so large that investors lose confidence in the government as a borrower and are no longer willing to lend it money – or require much higher interest rates to compensate for the riskier investment. At a minimum, that would be highly inflationary, typically leading to higher interest rates, making private access to credit and capital more costly, which can slow growth. And increased debt service costs cannibalize other national priorities.



Some observers argue that, while a fiscal crisis isn’t necessarily imminent, the U.S. is approaching a point where, if nothing is done, a crisis could become inevitable. The University of Pennsylvania Wharton School budget model estimated in the fall that “financial markets cannot sustain more than the next 20 years of accumulated deficits.” Annie Lowrey, an economics writer for The Atlantic, published a piece that sums up the new consensus: “It Turns Out That the Debt Matters After All.”

How this mattering will impact markets and to what extent remains to be seen. But it isn’t likely to be good, merely a question of how bad.

Perennial Great Ideas

What follows are my ten best ideas for managing your money in 2024 and beyond. I begin, as always, with my “evergreen” ideas – ideas that are always good and are much more important than my 2024-specific ideas. If you only follow-through on my “perennials,” you will almost surely be in excellent shape. These ideas are always good. You will have seen them before, even in this very Outlook. Ignore them at your peril.

Save more. Advisors who focus on retirement planning spend a lot of time and energy considering such things as asset allocation plans, decumulation strategies, and needs analysis. But advisors and their clients spend far too little time and energy on the most important factor of all – how much money is saved and how to save it. Saving is the most fundamental and most important component of successful investing. 

As my friend Wade Pfau succinctly points out in his seminal paper on this subject, “[t]he focus of retirement planning should be on the savings rate rather than the withdrawal rate.” Put another way, “someone saving at her ‘safe savings rate’ will likely be able to finance her intended [retirement] expenditures regardless of her actual wealth accumulation and withdrawal rate.” Using Wade's analysis, these “safe savings rates” generally range from 9.3 percent to 16.6 percent over 30 years under various sets of market conditions. Simply put, we should all be maxing-out out our defined contribution plans, usually a 401(k), every year of our working lives and leaving the money untouched until retirement.

Aggressive saving allows one to take advantage of compound interest, the so-called “eighth wonder of the world.” The best thing any of us can do for ourselves and for our families' futures is to save more and to keep saving more. 

Plan. Similarly, we should all have a carefully constructed plan for dealing with our financial futures. Every financial planning client, like every financial planner, should have such a comprehensive financial plan in writing and in place.

Diversify. The theory behind diversification is simple: Don't put all your eggs in one basket. A single holding has huge potential for gains if the right instrument is selected, but even huger risks (because investing "home runs" are so hard to come by). In general, the greater a portfolio's diversification, the lower its riskiness. Lower risk is a good thing, but only if the portfolio's potential return is healthy enough to meet the client's needs. Fortunately, a well-diversified portfolio captures most of the potential upside available with much lower volatility.

A diverse portfolio – one that reaches across all market sectors, foreign and domestic – ensures that at least some of a portfolio's investments will be in the market's stronger sectors at any given time, regardless of what's hot and what's not and irrespective of the economic climate. At the same time, a diverse portfolio will never be fully invested in the year's losers. For example, according to Morningstar Direct, about 25 percent of U.S. listed stocks lost at least 75 percent of their value in 2008 but only four of over 6,600 open-ended mutual funds lost more than 75 percent of their value that year. 

J.P. Morgan Asset Management published the distribution of returns for the Russell 3000 from 1980 to 2014. Forty percent of all Russell 3000 stock components lost at least 70 percent of their value and never recovered. Effectively all the index’s overall returns came from seven percent of components. Thus, a diversified approach provides smoother returns over time (even if not as smooth as desired!). On the other hand, a well-diversified portfolio will always include some poor performers, and that's hard for us to abide. As my friend Brian Portnoy quips, diversification means always having to say you're sorry. 

So, as a starting point, make sure your time horizon is long enough. If you don't have at least a five-year time frame before using the money, stocks are almost surely a bad idea. That's because the chances of negative returns over shorter time periods are too high. But over the longer term, our investment prospects with equities are bright.

Diversification pays off over the longer haul. It's the one sure "free lunch" in investing. I recommend it yet again, as always.

The “political trade” is a threat. We know that basing your investment decisions on your politics is a recipe for disaster (as detractors of President Obama who avoided the market from 2009 going forward found out and as detractors of President Trump discovered after the 2016 election). That's especially true because a president has far less control of market performance than is generally assumed. Those who love or (especially) hate any given political person, party, or policy need to be very careful that their politics don't dictate their investment decisions. This problem is of particular importance in election years.

“Personal Volatility” is dangerous. While a further correction or even a market crash remain real possibilities, the “personal volatility” of trying to time the market is almost always a bad idea. As the great investor Peter Lynch put it, “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” Furthermore, those who guess right and get the sell timing right almost never get the buy-back-in timing correct. Trying to guess and time the market almost never works once, much less twice or more.

Overall, markets are positive roughly three-out-of-four years. The market's path of least resistance is higher, making big cash positions a major risk. Moreover, investors and advisors should temper their tendency to fire money managers for recent underperformance. Multiple studies have shown that the wealth lost by investors from the practice of firing and hiring managers on the basis of recent performance – at both the personal and institutional levels – far exceeds the average net-of-cost underperformance of active management. This sort of "personal volatility" is highly dangerous.

“A sense of where you are.” The Pulitzer Prize-winning writer John McPhee wrote a wonderful book – his first, in 1965 – about Bill Bradley at Princeton called, indelibly, A Sense of Where You Are. It was about Bradley as the best basketball player Princeton had ever seen as well as his self-discipline, his rationality, and his sense of responsibility. The title comes from Bradley always knowing his position on the court, in relation to the basket, his teammates, the opposition, the situation and the score. 

Speaking to McPhee in the Princeton gym, Bradley looked him straight in the eye while tossing the ball cleanly through the hoop. McPhee was astonished. “When you have played basketball for a while, you don't need to look at the basket when you are in close like this,” Bradley said. “You develop a sense of where you are.” Bradley's constant awareness, as well as his athletic gifts, distinguished him as a player.

Good investors also need exceptional self-awareness. Dealing with risk doesn't just mean knowing how much tolerance one has for pain when markets are uncooperative. It means understanding how much risk capacity one can undertake without putting one's financial goals at risk and how much risk must be taken to assure that one's financial and investing goals are likely to be met. It recognizes that risk avoidance can be just as damaging as foolish risk-taking. It means understanding which risks are real and which are illusory. We all need a "sense of where we are" in our financial and investment journeys.

Don’t bet against America. As the late David Swensen, long-time head of the Yale Endowment, emphasized, "we should never underestimate the resilience of this economy." Avoiding stocks is betting against the American economy. Doing so has never turned out well. Don't sleep on U.S. stocks. 

Don't go it alone. American virologist David Baltimore, who won the Nobel Prize for Medicine in 1975 for his work on the genetic mechanisms of viruses, once told me that over the years (and especially while he was president of CalTech) he had received many manuscripts claiming to have solved some great scientific problem or to have overthrown the existing scientific paradigm to provide some grand theory of everything. Most prominent scientists have drawers full of similar things, almost always from people who work alone and outside of the scientific community. 

Unfortunately, these papers didn’t do anything remotely close to what was claimed, and Dr. Baltimore offered some fascinating insight into why he thinks that's so. At its best, he noted, good science is a collaborative, community effort. On the other hand, crackpots work alone. We all work better with help, advice, support, correction, criticism, and accountability. A good financial advisor not only can provide a good financial plan with excellent investment choices. He or she can also provide needed guidance for perhaps the hardest work to be done in finance: managing expectations, behavior, and our inevitable mistakes. Make sure you aren't trying to go it alone in the investment world.

Current Considerations

We all want “high leverage” ideas - the ideas that will make the biggest impact on our portfolios and our lives. But the best ideas available are not still more investment recommendations about hot sectors, hot funds, hot strategies, and hot managers. They are the Perennials outlined above. The data makes that abundantly clear.

We should focus on the Perennials above, like a broadly diversified global portfolio. We should worry far less about overweightings, tilts, and ideas are that unique to the current situation. They are far less important. Josh Brown explained why perfectly: “People can't be accurately modeled. And it's people who work and vote and invest and trade and make deals and stick things into themselves that require a trip to the emergency room.”

However, an important issue remains. A good portfolio that is used always beats a great or even perfect portfolio that is abandoned. And we abandon great portfolios with alarming regularity because they don't seem to be working today or simply because we want to trade. We're crazy enough to think that we can and should do better. “There's an element of the speculator in everybody,” said Rob Arnott, chairman of Research Affiliates.

As Tim Richards has persuasively argued, we are both by design and by culture inclined to be anything but humble in our approach to investing. We invest with a certainty that we've picked winners and sell in the certainty that we can reinvest our capital to make more money elsewhere. We are usually wrong, often spectacularly wrong. These tendencies come from hardwired biases and from emotional responses to our circumstances. But they also arise out of cultural requirements to show ourselves to be confident and decisive. Even though we should, we rarely admire those who show caution and humility in the face of uncertainty.

What should we do about that? It isn't practical simply to implore investors to stick with the plan, even a great plan. Most of us just aren't built that way. Legendary investor Benjamin Graham advised strictly segregating speculations from investments. His key idea in this regard was to set up a “mad money”account where you can take a flyer, if you must.

Moreover, this year's “flyers” are, in fact, solid approaches nearly all the time. They are good, solid opportunities now and for the future. Here they are.

Guaranteed income. Since at least 1965 and the seminal research of Menachem Yaari, economists have recognized that retirees should convert far more of their assets into guaranteed income vehicles during retirement than they do. Guaranteed income is the surest way available to deal with the three great threats to retirement income security: longevity risk, sequence risk and stupidity risk. 

Longevity risk is increasing steadily in that life expectancies continue to expand throughout the developed world and is exacerbated because consumers are both retiring earlier and have less and less access to private pensions. Moreover, the distribution of longevity is wide. Guaranteed income vehicles hedge longevity risk simply and efficiently as risk pooling makes them 25-40 percent cheaper than do-it-yourself options. Thus, retirees who purchase an income annuity assure themselves a higher level of consumption and guarantee it as well.

Sequence risk relates to market volatility and the order in which returns on a retiree's investments occur. Essentially, when drawing income from a portfolio, low or negative returns during the early years of retirement will have a greater impact upon overall success rates than if those negative or low returns occurred at a later point of retirement, even if the overall average return was the same. Therefore, if poor returns and ongoing withdrawals deplete a portfolio before the "good" returns finally show up, financial disaster can occur.

Stupidity risk relates to the management of portfolios to provide retirement income. Allegedly "safe" withdrawal rate provisions assume that both consumers and advisors will make and continue to make good choices throughout retirement. What we know about cognitive and behavioral biases as well as the real-life actions of consumers and advisors during periods of market stress doesn't just suggest, they scream, that we should be skeptical about the ability of people to make good decisions and keep making good decisions when the going gets tough.

Most “safe withdrawal” analysis assumes safety as something like a 90-95 percent success rate over a set period, commonly 30 years, and emphasizes that, most of the time, this approach should not only work, but should provide significant portfolio growth. However, with the consequences of failure being so high – being destitute at a time in life when vulnerability is at a peak – a 5-10 percent failure rate (which may be too low given that “100-year floods” seem to happen in the markets about once a decade or so) hardly qualifies as anything like “safe.” Moreover, limiting the analysis to a set period is similarly deceptive due to longevity trends.

Guaranteed income is almost always a good idea in retirement. For those who have saved less than they ought to have, it is crucial. Now that interest rates have increased substantially, guaranteed income vehicles are much more attractive than they have been in recent years.

Don’t forget about other forms of insurance either. Volatile markets provide effective reminders that stocks, despite their unmatched long-term value, can and do lose money sometimes. Those same volatile markets also provide a good opportunity for investors to make sure their insurance needs are in good order. Diversification in retirement planning approaches always makes sense.

Look Overseas. Historically, the relative performance between U.S. and non-U.S. stock markets is cyclical. The markets are generally mean reverting. However, U.S. equities have outperformed international equities for the last 15-plus years, often by a lot.

In the past, several factors have led to a turn in the performance of international v. U.S. equities. 

Relative Valuations: The MSCI ACWI ex-USA Index trades at a 33 percent 1-year forward P/E discount to the S&P 500, near the widest levels of more than 15 years of U.S. outperformance. Although valuation differentials may have a low correlation to short-term returns, they have an increasing impact the longer the holding period.

The U.S. Dollar: The dollar is a significant factor in the relative performance of international equities, contributing about 40 percent of international outperformance in 2002-2007 and half of its underperformance since then. The U.S. Dollar Index (DXY) sits at its highest level since late 2002, around the last time international began to outperform the U.S.

Market Concentration and Breadth: As noted above, just seven stocks contributed roughly two-thirds of U.S. performance in 2023, and the top 10 stocks now constitute roughly one-third of the S&P 500. The comparable numbers for the ACWI ex-USA Index are about 20 percent of the total return from the top seven stocks and 11 percent of the market cap in the top 10 companies.

Market Concentration and Breadth: As noted above, just seven stocks contributed roughly two-thirds of U.S. performance in 2023, and the top 10 stocks now constitute roughly one-third of the S&P 500. The comparable numbers for the ACWI ex-USA Index are about 20 percent of the total return from the top seven stocks and 11 percent of the market cap in the top 10 companies.

Trying to time a turn in relative performance is a fool’s errand. However, if you are looking for a trade idea with a reasonable chance of success, U.S. investors (who hold roughly 14 percent of their equity portfolio in international companies versus a 38 percent weight in the MSCI ACWI Index, effectively making a huge bet on domestic outperformance) might consider adding to their non-U.S. equity exposure.

Back to Basics

In the context of volatile and difficult markets (and markets are always difficult and volatile), it is important and helpful to restate some first principles about investment advice and what it can accomplish.

• The performance of a portfolio, especially relative to some arbitrary index, is not of primary importance. The only benchmark you should care about is whether you are on track to achieve your financial goals. 
• Volatility is not the same thing as financial risk. Real risk is the likelihood that you won’t achieve your financial goals. Your assets should be invested to try to minimize that risk.
• Goal-focused investing is the recipe for long-term financial success. This recipe doesn’t change when the market changes. In a world of seemingly limitless information, patience and discipline provide an enormous advantage. 

Great interpretations of difficult data sets, especially those involving human behavior, require more sculpting than tracing. Portfolio optimization is a wonderful scientific ideal. But portfolio optimization alone pays insufficient attention to the needs, desires and vagaries of the investor who owns it. At best, any Outlook is no more than the roughest of outlines.

Your mileage can and will vary.

Keep your attention focused squarely on specific needs, goals, and what you can reasonably expect to control about your portfolio and its results. In difficult and volatile times (Spoiler Alert: we live in difficult and volatile times), it helps to get back to basics and that’s about as basic as it gets.

I sincerely wish each of you a safe, happy, and prosperous 2024.