January 2024

Dear Joanna,

Niels Bohr famously said, "Prediction is very difficult, especially if it's about the future!" The sentiment is especially apt when it comes to economic forecasting. At the start of 2023, the predictions of 23 analysts from leading investment firms ranged widely, but the average forecast for the market return was 6%. Defying the expectations, the S&P 500 closed the year up 26.4%, surprising many. Given the ongoing debate around the various "hard," "soft," or "no-landing" scenarios that have dominated the headlines, it's safe to say that economic uncertainty is significantly elevated at the moment. 

Below, I look at the questions I'm often asked about 2024 and their potential implications for your portfolio.

If you're concerned that market events may affect your investment strategy and long-term plan, you may want to schedule a conversation with me to consider other options that would bring you more peace of mind. 

WILL RATES STAY HIGHER FOR LONGER?

Now that the Federal Reserve appears to be finished with its rate hike campaign, investors are focused on where rates will go from here. After the Fed’s December meeting where rates were left unchanged, the federal funds rate futures markets projected that the Fed would start cutting rates this spring, ending in a target range of 3.75% to 4.00% by year-end 2024. But as the Fed concluded hiking rates in 2023, its official policy statement suggested that it was still premature to declare victory over inflation and that future rate hikes can’t be ruled out yet. Although history has shown that the future path of interest rates is highly uncertain, we can analyze what such a scenario would mean for the stocks and bonds in your portfolio.

WILL THE COMEBACK FOR BONDS CONTINUE?

In 2022, bonds suffered stomach-churning declines as the Fed raised interest rates by a whopping 4.25%. However, for those who could stay the course, there are tailwinds to ride as a result. First, interest rates have risen and appear to be resting firmly higher relative to pre-pandemic levels, meaning both the expected return and expected yield are now higher for most bond portfolios. Both should provide for more capital growth opportunities for your portfolio relative to the past because proceeds from maturing bonds can be reinvested at higher rates, and it’s more likely that portfolio withdrawal rates can be sustained over time.

WILL STOCKS STAY ON A WILD RIDE?

Interest rate movements also have direct implications for stocks.



So, what would higher rates mean for stocks? It will increase the cost of financing for companies that need to issue new debt or refinance to support ongoing operations. This could hurt corporate earnings and stock prices. However, given how difficult future developments are to predict, altering your stock portfolio in response to this scenario is unwise because expectations of future performance are ever-changing. And even if stocks decline, research shows that gains can add up after big declines.

HOW UNPREDICTABLE WILL THE ELECTION YEAR BE?

In addition to potential monetary policy changes, the upcoming presidential election is also top of mind for many. With 34 Senate seats up for grabs along with all 435 House of Representatives, control of Congress also hangs in the balance. It’s important to remember that partisan control of Congress and the White House has had little impact on the economy and markets; U.S. GDP growth has continued to climb through each of the last 46 presidencies, and stocks have trended upward over the long term. 

WILL YOUR PORTFOLIO BE PREPARED?

While we can’t predict the future, we can certainly prepare for it. It’s important to view your portfolio through a long-term lens and not limit your decision-making to the next 12-month window. Like every year, one of the most important decisions you can make in 2024 is to ignore the noise and stay invested to meet your financial goals. If you’re still concerned that market events may affect your portfolio strategy and long-term plan, then you may want to schedule a conversation with me to consider other options that would bring you more peace of mind.