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Review the latest Weekly Headings by CIO Larry Adam.

Key Takeaways

• Inflation is receding faster than expected
• A soft landing would support better earnings growth
• Lower mortgage rates can help ‘unfreeze’ the housing market

Happy New Year! At the end of every year, we give our twelve wishes for the new year. As many of our 2023 wishes came true (e.g. steady job growth, lower inflation and the NASDAQ soaring above 12k), the positive performance of both the economy and financial markets this year is of no surprise. We hope the positive trends experienced this year will continue into 2024. Although our festive, aspirational wishes for the new year have a strong possibility of coming true, they are just wishes and are separate from our Ten Themes for 2024. Next week we will present our Ten Themes for 2024 that detail our key views on the economy and the markets, along with some actionable investment ideas for the upcoming year. In the meantime, let’s celebrate all the good things that happened in 2023 with three cheers for a happy, healthy and prosperous 2024! Here’s a quick recap of our 12 wishes for the new year:

1. One year Of world peace | Two ongoing wars (e.g.. Russia-Ukraine and Israel-Hamas), strained relations between the US and China, and China ramping up pressure to re-unify with Taiwan have kept geopolitics in the spotlight in 2023. While tensions remain elevated, we are hopeful that 2024 will bring either a peaceful resolution (best/hopeful case) or continued containment. As long as the conflicts do not pose a threat to global growth, markets will continue to look past these skirmishes.
2. Inflation closer to 2% | The Fed’s preferred measure of inflation (core PCE) is receding much quicker than expected. In fact, on a six-month annualized basis, core PCE is now running at a 1.9% pace! This has prompted a Fed pivot and fueled an ‘everything’ rally. Here’s to hoping there is not a second wave of inflation so the Fed can cut rates and stimulate the economy.
3. 10-year yield starting with a three | 10-year Treasury yields have plummeted from a peak above 5.0% in October to 3.8% as a Fed easing cycle is coming into focus in 2024. Welcome news for bond investors and lower borrowing costs for consumers!
4. Unemployment rate under 4% | The unemployment rate has remained at historically low levels despite the Fed’s attempts to slow down the economy. Twenty-two consecutive months of unemployment below 4%—its longest stretch since the late 1960s—has kept job growth at healthy levels, despite some slowing. If the trend continues in 2024, it will be great news for consumers who make up ~70% of the economy!
5. S&P 500 climbs to 5,000 | An earlier than expected Fed pivot has driven the S&P 500 a stone’s throw away from reaching an all-time high of 4,796—a level last seen in January 2022. Investors will certainly cheer if the Fed successfully engineers a soft landing (our bull case), which could propel the S&P 500 above 5,000 in 2024!
6. 6% mortgage rates | Home affordability was a major challenge in 2023 as mortgage rates climbed to their highest levels in more than 20 years. We’re hoping lower mortgage rates will help ‘unfreeze’ the housing market in 2024.
7. Dividend growth of 7% | Dividend growth dipped below its long-term average of ~7% in 2023 as investors chased higher yielding fixed income investments. Income-seeking investors would be thrilled to see dividend growth back to 7%!
8. Oil below $85 per barrel | After two years of volatility and price spikes driven by wars in Ukraine and the Middle East, some stability in oil prices would sure be nice. We are hoping ramped up US production continues to offset OPEC+’s voluntary cuts.
9. Junk bond yields below 9% | The broad selloff in rates over the last few years drove junk bond yields above 9.5%, prompting concerns that it could be tough for issuers to refinance or service their debt. Lower rates in 2024 should help ease the pain on weaker corporations that have less flexibility with their borrowing needs.
10. 10% earnings growth for mega-cap tech | Mega-cap tech has dominated the S&P 500’s performance for more than a decade. Despite a blockbuster 2023 and concerns about elevated valuations, investors will still have reasons to cheer if mega-cap earnings generate 10% or more earnings growth in 2024.
11. All 11 sectors in positive territory | For much of 2023, the S&P 500’s performance has been driven by narrow leadership. However, the broader market has been participating in the recent gains. We hope this trend continues so all eleven sectors of the S&P 500 can generate positive returns in 2024. A broadening of performance would be beautiful!
12. 12 months recession free | The most telegraphed recession never materialized in 2023. While we are calling for the mildest of recessions in 2024, there is a reasonable possibility that the US economy could avert a recession again next year. This would be particularly welcome news for the equity market as earnings would likely come in better than we expect!

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