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PWM Market Comment (Jan '24)

PWM Market Comment (Jan '24)

January 18, 2024
  • In 2023, markets outperformed expectations, delivering particularly strong 4th quarter returns as more asset classes and sectors participated in a bull market that began narrowly concentrated in U.S. information technology mega-cap stocks.
  • While potential upside risks to inflation remain, the enduring strength of the labor market in conjunction with an expectation of upcoming interest rate cuts offers more reasons for optimism than twelve months ago.

As we begin 2024, the global stock market and economy present a complex and multifaceted picture. Financial markets have been navigating through a period marked by significant challenges, including lingering effects of the COVID-19 pandemic, elevated geopolitical tensions, and central banks' responses to inflationary pressures.  In the last few months of 2023, those markets proved quite resilient, despite so much uncertainty.

Stock markets continue to experience volatility. Key indices, such as the Dow Jones Industrial Average, the S&P 500, and technology-heavy NASDAQ, have shown fluctuations, responding to both domestic and international events. Technology and energy sectors are notably at the forefront of these shifts, influenced by regulatory changes, environmental policies, and innovation dynamics.  A welcome change of pace in the stock market was the broadening breadth that occurred toward the end of last year.  While only a small number of very large technology stocks led the charge throughout 2023, many other companies finally joined the rally and pushed the markets even higher.  While the concentration of winners is tight by historical standards, and the valuation of the US stock market remains elevated, the trend is still favorable at this time.

Inflation is, and has been, a major concern for economies worldwide. Central banks, notably the Federal Reserve in the United States, have been implementing monetary policy adjustments, primarily through interest rate hikes, to temper inflation. While necessary, these measures are designed to slow economic growth, sparking concerns about potential recessionary effects.  More recently, the consensus on Wall Street is those interest rate hikes are now behind us, as inflation continues to trend lower. Many believe the Fed will begin cutting rates this year, to stimulate better growth.  This newfound optimism was another tail wind for markets in Q4 2023 and that momentum remains in place today.

Globally, the economic landscape is diverse. Emerging markets are grappling with their own set of challenges, including currency fluctuations and external debt burdens, while developed economies are focused on sustaining growth amid inflationary and geopolitical headwinds.

The labor market, however, has shown resilience in the US, with unemployment rates remaining low and job growth steady, contributing positively to consumer spending and economic stability.  The strong labor market gives many investors reason for optimism in 2024, despite the higher interest rates that remain.

Investors and policymakers are closely monitoring these developments, balancing the need for inflation control with the imperative of supporting economic growth. The situation remains dynamic. Our Pacific Wealth Management investment portfolios are currently neutral on stocks, slightly underweight bonds and overweight money market.  We remain tactically nimble as the fluid economic situation will likely present opportunities in both stocks and bonds in the first half of the new year.