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Economic Commentary Review of 2023 and Expectations of Q1 2024

Happy New Year! I hope all is well and that you enjoyed a safe and joy-filled holiday season!

Wow! What a rally in the markets to finish out 2023! Most benchmarks were positive in 2023, with the S&P 500 gaining 26.3% and the Dow Jones gaining 16.2%[1]. Following a challenging environment for equities and bonds in 2022, technology and growth stocks performed best in 2023. This was unexpected by experts and economists alike as the historically aggressive interest rate hiking cycle delivered by central banks around the world in 2022 to combat inflation created the nearly unanimous expectation of a recession to follow. According to data from the ICI, assets held in bank deposits, money market funds, and certificates of deposit (CD’s) had ballooned to over $19 trillion as of February 28th, 2023. I attribute this to higher interest rates on cash, and more logically, the expectation of a recession, which led investors to seek shelter in conservative alternatives, ultimately missing the rally in markets.

Bonds also rallied in November and December 2023, albeit at a fraction of the pace of the equity markets. U.S. Aggregate Bonds returned 4.2% in 2023[2]. Considering the historic declines in bonds in 2022, the setup for a rally in bonds in 2024 and 2025 could be robust. If the Fed does begin to lower rates-as I expect they will-this will not only be a boost for small to medium sized company stocks but for bonds as well. Longer term, the more normalized interest rate environment could make bonds a stronger contributor to client portfolios than they have been since 2006. This will help investors with more conservative to moderate risk appetites, who do not want to over-expose their assets to stock market volatility. The 60% stock /40% bond portfolio is certainly not dead, as many surmised in the past few years.

The U.S. Stock Index that has lagged the most in performance over the past 3 years is the Russell 2000 (an index of 2000 smaller sized U.S. companies) with a 3-year average return of negative .70%[3]. In fact, many companies in the index remain down over 50% from all-time highs set in 2021. Why does this matter? Small businesses employ nearly 50% of private sector employees and nearly 63% of new jobs created in the U.S. between 1995 and 2021 were via small businesses[4]. So why the underperformance vs. the S&P, Dow? Small businesses rely more heavily on borrowing and credit lines as they grow their business and as lending rates increased, this placed more pressure on the ability of small business to operate and grow. The expectation in 2024 is that the Fed, (which is the central bank of the U.S.) will reverse course and begin lowering rates, possibly as early as Q1 or early Q2. As rates begin to drop, borrowing will become less expensive, and this will help small businesses grow and may provide added fuel to a broader stock market rally.

So, where do we go from here? The idea of a “soft landing” means that the Fed successfully gets rates back to normalized levels (with inflation at 2% or in that range) without pushing our economy into a recession. Given the historical failures in achieving this result, it’s little surprise that investors began to hoard cash in 2023 and doubt the Fed’s ability to right the ship. The case exists for both a “soft landing” scenario, as well as a deeper recession. The argument for a recession is tied to inflation remaining sticky or moving back up. Currently, that is one of the more significant risks to the U.S. economy. The most recent inflation report for December 2023, released January 11th, 2024, came out slightly higher than expectation at 3.4% jumping up from the 3.1% read for November 2023[5]. I am monitoring this closely and the inflation issue remains fluid and critical to the trajectory of our economy and markets. However, throughout 2023, we saw meaningful signs that a soft landing is indeed a real possibility. If you consider what happened in the mid-1990s, Alan Greenspan, the chairman of the Fed, raised rates seven times- battling similar concerns about an overheating economy and inflation. Between 1994 and early 1995, they doubled the Fed funds rate to 6.05%, which led to stocks struggling. When Greenspan stopped raising rates in 1995 and implemented a strategy of rate cuts, the economy and stock market did very well in the years that followed through 1999. We don’t know if history will repeat itself but there is hope for optimism!

This year is also an election year. Since 1952, the S&P 500 has averaged a 7% gain during U.S. presidential election years. Interestingly, since 1952, we have not had a negative year for the S&P 500 during a presidential re-election year, and the average return for the S&P 500 during a presidential re-election year since 1952 is 12.2%[6]. More historical data that provides hope!

While I am certain throughout history every generation has felt they are living through a unique time full of unprecedented uncertainties, I believe it is fair to say, these past 5 years have been some of the most challenging. We have our “trade war” which began with China in 2018 and is ongoing today, a global pandemic unlike anything in 100 years, inflation not seen since the 70’s, and wars in Europe and the Middle East. An impact of all of this, the worst growth for the global economy in 30 years[7]. Yet, here we are, persevering through the adversity!

I remain steadfast in my belief in long term planning, preparation, and proper diversification, while aligning your portfolio to your comfort level for risk. Time and time again, it is proven that markets cannot be timed. No one has a crystal ball, and no one knows what major world event will occur next. Our best strategy is to be well-diversified, across asset classes and remain optimistic and vigilant during times of fear and panic. Our companies remain some of the best in the world, providing goods and services to every corner of the earth. Our people are some of the brightest and hardest working in the world. I believe more strongly than ever in the long-term trajectory of the U.S. and global economy!

I would also like to follow up on some news you may have received recently about our clearing firm, Woodbury Financial. Woodbury’s parent company Advisor Group owns several other investment firms like Woodbury. They have made the decision to consolidate these firms into one company, called Osaic Wealth. This has absolutely no bearing on your investments, on me, or on Capital Harvest Wealth Partners. Your account numbers, online access, and investments will remain the same. I will remain your point of contact. Please know I am here to answer any questions you may have about this name change.

Thank you for the opportunity to serve you. My priority remains and always will be to ensure that you continue to receive high quality guidance and a client service experience second to none. While I continue to reach out via phone and e-mail, please know that I am available via Zoom, Facetime, any other digital technology you prefer and in person if you would like to meet. I am happy to meet with you at any one of my offices or at your home or near your home, whatever you prefer and with whatever you are most comfortable.

Wishing you, your family, friends, colleagues and community continued hope, health and positivity in the coming weeks, months and beyond!




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