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Quarterly Market Recap : January 2024

Capital Markets Recap

• The US economy was stronger in 2023 than economists forecasted with real GDP projected at 2.3% growth. Economists continue to be bearish and projects only 0.9% real GDP growth for 2024.

• The US economy was stronger in 2023 than economists forecasted with real GDP projected at 2.3% growth. Economists continue to be bearish and projects only 0.9% real GDP growth for 2024.

• Employment is strong with unemployment at 3.7%, but job openings have declined indicating a potential weaker labor market in 2024.• Inflation declined to an annualized rate of 3.1 % in November as the rapid rise in the FED funds rate have has succeeded in bringing down inflation from its Summer 2022 peak of ~9.0% .

• The S&P 500 had a strong 4Q23, increasing 11.2% led by REITs and Tech as both benefited from big decline in interest rates.

• The 10-year Treasury bond yield declined by 71 bps during the quarter to reach 3.86% triggering a bond rally that led to the Aggregate US Bond Index returning 5.3% for 2023 despite being in negative territory for most of the year.

• We favored intermediate term bonds, and continued to recommend investors increase maturities in their portfolios.

• We recommend bond ladders of Intermediate bonds with attractive yields combined with longer maturity bonds for higher potential of price appreciation.as interest rates decline.

• Short term interest rates remain at attractive levels, but have reinvestment risks once the FED lowers interest rates which we expect in 2024 .

• Studies show that market timing typically produces inferior returns. We encourage diversification and a focus on working towards financial planning goals.

Economic Data Points                          As Of

Unemployment                               3.7%               5-Jan-24
10 Yr Treasury Rates                    4.11%             22-Jan-24
30 Yr Mortgage Rates                  6.60%              18-Jan-24
CPI YOY                                            3.4%              11-Jan-24
US GDP Growth Q4 2023              4.9%            21-Dec-24


Model Portfolio Positioning

Fixed Income & Alternatives

Equities

Looking Ahead

  • Geopolitical unrest and the risks to global growth:
    • Global unrest is rising following the Hamas attack on Israel, Israel's response in Gaza, Houthis in Yemen attacking international shipping in the Red Sea, and Iranian proxies in Iraq and Syria targeting US soldiers.
    • The US response will be scrutinized heavily for any weakness and could embolden dictators to make mistakes.
    • A Cold War 2.0 has started with Russia, China, and Iran on one side and the West and allies on the other side. The delineations are less clear than in the past, but increased tension and separation will have negative consequences for trade, globalization and economic growth as resources are allocated away from consumers to defense.

  • Economic growth, unemployment, and FED action:
    • The FED signals the next move is a reduction in interest rates. This should support US economic growth and employment with a higher probability of the FED achieving a soft landing, avoiding a recession.
    • The corporate sector remains strong with job openings still exceeding the number of unemployed which should support high employment, and by extension the US economy.

  • US Government shutdown and budget deficits:
    • The US Congress passed a continuing resolution last year to avoid a government shutdown and the parties agreed in early January on another compromise for the rest of 2024.

  • US Government Debt:
    • US debt to GDP has doubled in the last 15 years. Continued large budget deficits such as the 2023 deficit of ~8% of GDP will move US debt substantially higher in the next decade.
    • Interest payments on the national debt will consume a higher, and higher percentage of the government's budget. This will crowd out other spending and make a reduction in the deficit much harder the longer we delay in bringing spending under control.
    • Increasing the debt is not a problem from low debt levels, but eventually becomes a problem when debt levels are high and more difficult to fix.

  • FED action and the bank sector:
    • Higher interest rates enabled banks to improve their earnings through increased spreads in 2023.
    • We expect banks to be slow to reduce lending rates once the FED lower rates, but will be quick to reduce deposit rates. Combined with higher valuations of bond portfolios from lower rates, we expect the health of banks to improve in 2024.
    • We expect a decline in debt/mortgage cost in 2024 accelerating into 2025 that is positive for economic growth.

  • China growth, real estate and trade friction:
    • China's real estate bubble with large amounts of bad debt among its large developers such as Evergrande and Country Garden will threaten growth for China going forward, and by extension raw material prices.
    • President Biden has stopped the sale of top technology to China and China has retaliated by limiting exports of two key materials used in semiconductor and solar panel manufacturing. A trade war will hurt economic growth.
    • As China has become more militant and increased its military power, the risk of a mistake has increased including a Chinese invasion of Taiwan, which would be very negative for global growth.
    • The risk from trade wars is lower future global growth as countries decouple leading to increased deglobalization, hurting trade.

  • Economic growth, corporate earnings, and financial markets:
    • Putting it all together, we expect the US economy to achieve a soft landing in 2024, while the risk of a mild recession has declined. Consensus US corporate earnings are projected to resume DD growth in 2024 and 2025. We are skeptical about 2024 EPS estimates, but can see upside to 2025 EPS estimates. We like corporate bonds due to a combination of strong balance sheets, attractive yields. and the potential for rising prices when yields decline. Importantly, we recommend long-term investors to stay invested as patient investors were rewarded well in 2023.

Disclosures

These are the opinions of Ascend Wealth Planning, LLC and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Investing in securities involves risk of loss. Further, depending on the different types of investments there may be varying degrees of risk Clients and prospective clients should be prepared to bear investment loss including loss of original principal. Fixed income investments are subject to various risks including changes in interest rates, credit quality, inflation risk, market valuations, prepayments, corporate events, tax ramifications and other factors. Diversification and asset allocation strategies do not assure profit or protect against loss. Indices mentioned are unmanaged and cannot be invested into directly. Past performance is not a guarantee of future results. Registered Representatives offering securities through Cambridge Investment Research, Inc., a broker-dealer, member FINRA/SIPC and Investment Advisor Representatives offering advisory services through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Cambridge and Ascend Wealth Planning, LLC are not affiliated.