Written by Alex Seleznev, MBA, CFP®, CFA | Jan 17, 2024
“Mixed signals: Interest rates will fall, but our panelists don’t see another magnificent year for stocks.”
This was the headline of the latest Barron’s roundtable, featuring some of the country's most prominent fund managers.
We happen to agree with the overall message and offer our thoughts that will hopefully help you better navigate the investment climate this year.
1.) Time to Review Your Bond Allocation
Interest rates are expected to decline in 2024. According to the Federal Reserve Bank’s (Fed) projections, there will be three rate decreases, each by 0.25%.
The markets are even more hopeful, anticipating up to six rate drops by the end of the year.
For those who are nearing or in retirement, this is a good time to potentially take advantage before bond yields decline. Bond prices tend to go up when interest rates decline.
There are many options that still have yields between 4% to 5% with maturities of up to three years.
Individual bonds, specifically U.S. Treasuries, are a great choice in many situations. Municipal and corporate options can also be used for better tax efficiency or higher yields.
Depending on specific circumstances, growth-oriented investors should also consider taking some gains off the table. Keeping some funds in bonds yielding close to 5% is not a bad strategy in anticipation of more market volatility.
2.) Markets Tend to Reflect Most Positive News
The stock market is always forward-looking and tends to discount most known events, current and future.
The fact that the economy is doing reasonably well with almost record-low unemployment rates does not by itself mean the market will continue to deliver double-digit returns.
There is a tendency for many retail investors, and even some professional advisors, to be complacent after a year of positive returns and when the future appears to be positive.
The next market disaster is just around the corner.
You don’t need to be intimidated. This is just how the markets work. When things are mostly positive, even a small negative update can result in a market sell-off.
Don’t fall asleep at the wheel!
Bonus idea: Many great dividend-paying stocks had relatively muted performance results in 2023 and can be considered bargains when compared to their growth-oriented counterparts.
3.) Election Year Predictions
Election years tend to be choppy but there is a history of positive performance.
According to the research performed by First Trust, there have been 23 elections since the S&P 500 Index began.
19 of the 23 years (83%) provided positive performance.
The average return for all election years is 11.28%.
Just like any other statistic, it should be taken with a grain of salt, however.
Depending on your level of involvement in the political discourse, we encourage you to focus on the long term, as emotions tend to run high when “not the right” candidate is elected to the office.
Emotional responses can be dangerous for your financial well-being in both the short and long term.
4.) Be Cautious on International Stocks
In our view, the benefits of diversification do not outweigh the geopolitical risks and apparent slowdown of major economies such as China, which is expected to grow at only 3% in 2024.
Plus, the on-shoring trend will likely continue in 2024 and beyond.
Many domestic companies, specifically large multinational companies, already receive significant revenues from outside the country without the many risks associated with investing in companies domiciled outside of the U.S.
Be careful and selective if you decide to invest in international stocks.
5.) Real Estate Investments
Many potential home buyers have been on the sidelines given the high interest rates in 2023.
As interest rates begin to decline, real estate activity will likely pick up and impact many sectors of the economy ranging from builders to transportation companies and mortgage lenders.
Real Estate Investment Trusts (REITs), investments that tend to have above-average dividend yields, are also potential beneficiaries of such an environment.
This area of investing is of particular interest to us, and we plan to spend more time analyzing different REIT options for our clients.
Please be warned. REITs require more extensive investment knowledge and may not be appropriate for many retail investors.