The Federal Reserve’s recent announcement of potential monetary easing has set the stage for an exciting end to the year in the market. With three projected interest-rate cuts in 2024, and expectations for even more, investors are buzzing with anticipation. The mere hint of looser monetary policy has ignited a fire under the market, propelling the Dow Jones Industrial Average to a record high with a staggering 2.9% surge last week. In lockstep, the S&P 500 index climbed 2.5%, and the Nasdaq Composite advanced 2.85%. In fact, the yield on the 10-year Treasury note closed below 4% for the first time since July.
What’s even more encouraging is that this rally isn’t limited to the usual suspects. While tech-related stocks like Apple and Nvidia have been the driving force behind the S&P 500’s impressive 22% gain this year, other sectors have now joined the party. Last week, lagging sectors such as materials and real estate experienced notable gains, both climbing over 4.5%. This broadening of the rally indicates a healthier market with a broader range of opportunities.
For investors, these last two weeks of 2023 may present a welcome break. Even less-than-dovish comments from New York Fed President John Williams failed to put a damper on the market’s momentum. Barring any unforeseen shocks, it seems that the good fortune of this rally will continue through the year-end.
David Donabedian, Chief Investment Officer at CIBC Private Wealth US, believes that investors see the Federal Open Market Committee meeting as a green light to price in an ideal investment scenario for 2024: falling inflation and moderate economic growth. He describes this rally as powerful and advises not to stand in its way during this seasonally positive time for equities.
Coinciding with this market optimism is the sighting of a bull, playfully named Ricardo, running on the train tracks in Newark, N.J. Some have interpreted this as an auspicious sign to relax and enjoy the holiday season over the next few weeks, leaving worries aside.
So, as we enter the final stretch of 2023, investors can revel in the festive spirit of this market rally and look forward to what lies ahead in the new year.
Avoiding the Slaughterhouse: Key Considerations for 2024
In 2024, it is crucial to take steps to steer clear of potential financial risks and economic downturns. While lower interest rates may initially seem beneficial for both consumers and businesses, it is important to understand the underlying reasons for this trend.
The Federal Reserve does not cut interest rates out of generosity; they do so to address weaknesses in the economy and mitigate rising financial risks. As monetary tightening measures take effect with delays, we can anticipate their impact on the economy next year.
Unfortunately, this could result in a credit-tightening recession. The fact that traders are pricing in up to six rate cuts within the next year suggests that any economic landing will be harsh rather than gentle. While a slowdown may persist for a few quarters, it can potentially lead to a stronger bull market in the latter half of 2024.
Considering this scenario, investors need to approach their asset allocations more cautiously. Although small-cap and mid-cap stocks tend to outperform during periods of declining interest rates, it might not be the opportune time to make significant investments, even with attractive valuations. Instead, a safer approach would be to explore sectors that have fallen out of favor but are beginning to rebound, such as utilities, consumer staples, and healthcare.
Lastly, it is essential to maintain a level-headed perspective during the festive season. Excessive holiday cheer can often result in a disappointing aftermath.