Last year created quite a conundrum for investors. Money markets were finally paying decent dividends with the yield on Schwab’s money market peaking at 4.46%. With the volatility in the stock market and the poorly performing bond market this seemed like a safe bet and many investors left their money in cash to clip this dividend.
But as is often the case in the markets, when things looked the bleakest, that is the time to invest. We had just come through the worst bear market since the great financial crisis as the Federal Reserve continued its rate hiking cycle. The dominant narrative since November of 2021 has been how high will the Fed go and how long will they stay there.
As 2023 progressed, there was much speculation about these two things and as the year came to a close, the Federal Reserve provided clarity on both these issues. At their December 17th – 18th meeting they made it clear that they intended to stop raising rates and even cut up to three times in 2024.
2023 ended with large cap stocks up 26.3%, international equity up 18.9% and small cap equities ups 16.9%. Even bonds which struggled in the beginning of the year ended up 5.5% besting the 4.5% offered in money markets.
So what about 2024? We know from past market cycles that this is usually a key time to invest. In their first quarter Guide to the Markets, J.P. Morgan Asset Management looked back on the last six times that interest rates peaked and what happened in stocks, bonds and a 60/40 portfolio in the subsequent 12 months. (see below chart)
In every instance with the exception of 2000, the subsequent 12 month returns in stocks, bonds and a 60/40 portfolio were strongly positive.
The S&P 500 in 2000 was negative primarily because of the dot.com boom of the late 90’s that had bid up the price-to-earnings ratio to 37 x’s. Long- term averages are at about 17 x’s so clearly the market had a long way to drop before these valuations returned to normal.
Current market conditions put us at about 19.5 x’s which is by no means cheap, but is still within one standard deviation of the average and justifiable as we look to 2024 and anticipated interest rate cuts.
As we look to 2024, we anticipate a good year for both stocks and bonds coming off a great year for stocks and reasonable year for bonds in 2023.
So as to the question as to whether to invest or not to invest – we would say invest. As is clearly indicated by the below chart, market conditions should be ripe for good returns moving forward.