Most financial “media” pundits like to come out with a New Year’s market outlook during the holidays or first week of January.

This year, I intentionally wanted to wait until the hype settled to have a more concentrated conversation on two areas of focus with you.

Above all the details, the theme of my market commentary and objective for 2024?

Fight Through the Noise.

There will be a lot of noise this year. For those of you who know me well, I devote a good portion of my study time to the behavioral elements of finance. Of course, there are numerous technical metrics my team and I are staying up-to-date with on a weekly basis, but whether we like to admit it or not, the economy is driven by the people. Fear, greed, influence, frustration, bias, uncertainty, emotion, etc. All of these actions drive the economy and have no “technical” merit on their own. We discuss these behaviors from time-to-time in our conference room with many of you.

The Election

The reason I remind you of this behavioral component is my belief that “emotion” and “uncertainty” will be two of the biggest market “influencers” this year. From a Canadian perspective, the US political landscape seems more divided than ever before, at least in the time I have lived in the good old US of A (2008). We continue to head down the path toward the most contentious election in American history. As we move into the summer, after the completion of more primaries and the media shifts focus almost exclusively to election coverage, we could be faced with some short-term volatility within the markets.

With the behavioral aspect in mind, I will add some technical data for everyone – the average S&P 500 return in the 4^th year of a Presidential cycle (aka. an election year) from 1950 to now is approximately +7%. There is more depth to this – Republican versus Democrat, a new President versus a re-elected President, etc. However, I feel my job is to wade through all the detail and provide you the bottom-line. If we think back to past elections, most people feel panic and fear. The reality is that the markets are still moving up, despite American citizens’ best efforts to dampen the technical facts with their behavioral influence.

Back to my theme of fighting through the noise – you know I don’t have a crystal ball in my office. However, I am certain that this year will be a microcosm of the market – short-term swings up, down, and sideways; sometimes explainable, sometimes unexplainable. The focus in these times always needs to be about your investment, income and tax plan (not the CNN or Fox News market tickers).

A lot of you have heard me say this – remember that your investment strategies are “bucketed” into different time horizons:

• No risk investments are in your “now” bucket for immediate income you are going to need consistently. These dollars aren’t affected at all by market movements.

• Low-medium risk investments are in your “soon” bucket. You don’t need to access these funds within the next 2-5 years. The market gain or loss on these funds won’t be at the same rate as the movement of the market itself. Additionally, we may have buffers and/or hedges on these investments to minimize short-term losses.

• Medium-high risk investments are in your “later” and “never” buckets. You may never utilize these funds for income in your retirement plan. Therefore, we can afford to withstand some short-term market volatility for the sake of long-term wealth building.

If we are a rational investor, we understand the market isn’t always going to go up. With that said, investors fear the down years more than they enjoy the up years. More specifically, they fear the BIG “down years”.

The history of the market from 1937-2022:

• 65 “up” years (76% of the time)
• 21 “down” years (24% of the time)

A comforting stat:

• Of the 21 “down” years we’ve had, only FOUR had annual losses of greater than 20%
  • (It can happen, but it doesn’t happen often.)

A friendly reminder that our portfolio accounts at Schwab need to be viewed with the big picture in mind. If we focus too closely on the week-to-week or month-to-month, we can lose sight of the benefits in our “later” bucket strategy.

Interest Rates

On the technical end of the investment landscape, the Federal Reserve’s (The Fed) decision making regarding a reduction in interest rates will be something our team is monitoring closely in 2024.

As we’ve finally begun to see some “decent” interest in our savings accounts at the bank due to this seismic increase in rates over the past two years, we don’t like to be reminded that the increase was a result of an attempt to combat aggressive inflation.

The Fed has been clear with their intention to reduce rates periodically through 2024. At the time of this article (January 2024), the fed rate is at 5.5%. There are a lot of projections out there, but it is likely that we will see a 1-2% reduction in rates by the year’s end. What impact will this have on the market?

I feel like it will be a major balancing act between two outcomes:

The Positive Outcome:

• As rates drop at an appropriate pace, it could bring a positive spike to the markets as lower rates typically drive economic growth and business development.

The Negative Outcome:

• If the Fed becomes too aggressive with their rate decreases, inflation could begin to ramp up again. The worst-case scenario is we enter a spin cycle back to a 2022 type environment again.

It will be interesting to see how they manage the “soft landing” that has become a go-to explanation to recession worries. Most economic forecasting is pointing towards a softer landing than a free-fall into a recession. You know that I don’t particularly like forecasting and projections because the numbers can get skewed quickly when human beings get involved.

Ultimately, I think the outcome will be somewhere in between the positive and negative stated above. Consumers are feeling pain from a spending standpoint (behavioral!) and that can influence the economy. My hope is that the Fed will be successful with rate reductions to where a recession is not “felt”, even if the numbers say otherwise.

The Bottom Line:

Depending on how aggressively rates are cut, how bad or overblown the consumer’s financial situation has become, and the impact of corporate spending and employment will dictate the outcome of a “green” or “red” year. If these stay in line with expectations, then I think there is reason to be cautiously optimistic (barring an unanticipated scenario).

The “emotion” and “uncertainty” around our political landscape will be the behavioral drivers that can either keep the US economy in line or drive it away from the barometers that we track. 

I don’t think 2024 will be a year for the record books, but as a financial planner, I also don’t believe the uncertainty and fear needs to be overblown. Remember, the media and politicians don’t know about your custom financial plan that has largely eliminated the impact of year-to-year market fluctuation on your income longevity. Fight through the noise and as always, let us know how we can assist in getting you through it.

Onward and upward!