A Turning Point

A Turning Point

In 2024, we believe markets will make a definitive turn to a more recognizable place. En route, the transition will be marked by meaningful shifts in a few key areas. Inflation is going down. The risk of a recession is bubbling up again as the effect of post-pandemic stimulus wanes. And the end of the Federal Reserve’s (Fed) rate-hiking campaign is indeed upon us.

All of this said, it doesn’t mean that 2024 won’t have its own surprises or potential challenges. Reflecting on 2023, we certainly experienced our fair share of unexpected events. There was positive news: The U.S. economy was strong and the stock market performed relatively well, despite the Fed tightening monetary policy and raising interest rates. On the downside, we faced a regional banking crisis driven by interest rate risk and saw escalating conflict in the Middle East, reminding us that markets are seemingly constantly overcoming obstacles.

LPL Research’s Outlook 2024: A Turning Point provides insight and analysis into next year’s opportunities, challenges, and potential surprises. We understand that making progress toward long-term financial goals requires a strong plan and sound advice. The insights in this report, combined with guidance from a financial professional, will help position investors to navigate this turning point and work toward achieving their objectives.

EXECUTIVE SUMMARY

VIEW EACH OVERVIEW TOPIC'S ANALYSIS SUMMARY

ECONOMY OVERVIEW

The economy grew faster than expected in recent quarters, unemployment remained historically low, and activity in some sectors grew (e.g., homebuilding), despite the macro headwinds. The labor market seemed to be a boon for workers, in prime position to bargain for better pay and more benefits. In 2024, we believe a recession is likely to emerge as consumers buckle under debt burdens and use up their excess savings, but a Fed that is sensitive to risk management might provide an offset by taking interest rates down again in the new year. Inflation may still remain a concern, but the Fed will likely be less laser-focused given the trajectory is going in the right direction. In sum, we expect a mild recession to occur in 2024, although that may usher in some interest rate decreases from the Fed and offset some of the economic and market impact.

STOCKS OVERVIEW

Following the Fed’s aggressive rate-hiking campaign in 2022 and 2023, stocks are entering a phase in which market participants will be focused on interest-rate stability—as inflation, we believe, comes down further. Meanwhile, interest rate stabilization should help support stock valuations. And while rates may be the most impactful driver of stock valuations, corporate profits are moving into a sweet spot. Stocks look fully valued at current interest rates, but if rates ease as we expect, we see upside to a year-end 2024 fair-value target range of 4,850 to 4,950. This is based on a price-to-earnings ratio (P/E) of near 19.5 and our 2025 S&P 500 earnings per share (EPS) estimate of $250. Thus, we believe stocks could provide mid-to-high single digit returns in 2024. Risks include a potential widening conflict in the Middle East or Europe, an increase in U.S.-China tensions, and reacceleration in inflation that pushes interest rates higher.

BONDS OVERVIEW

The move higher in yields in 2023 was unrelenting, rising alongside a U.S. economy that continued to outperform expectations. With a still-resilient economy to-date, we think Treasury yields could stay relatively high in the near-term, although rates may subside a bit versus the 2023 volatility we have witnessed. Issuance of Treasury securities to fund budget deficits and the potential for the Bank of Japan (BOJ) to finally end its aggressively loose monetary policies in 2024 could keep some upward pressure on yields. However, the big move in yields may have already taken place, and with a potential directional change in interest rates likely coming in 2024, we believe bonds offer compelling value.

CURRENCIES OVERVIEW

The U.S. dollar staged a strong comeback over the second half of 2023. Capital usually goes where it is treated best, and global capital was enticed back to the U.S. on clearer prospects of economic growth and higher rates of return. The dollar remains quite overvalued, however, on a purchasing power parity basis against currencies like the yen, euro, and British pound. But unless global markets witness a more persistent shift toward synchronized global growth, a scenario we are not expecting, foreign currencies as a whole will likely struggle to meaningfully outpace the dollar. Meanwhile, the clear risk for the euro heading into 2024 is that the European Central Bank (ECB) will be forced to aggressively reverse its current tighter policy stance.

GEOPOLITICS OVERVIEW

With the onset of the war in the Middle East, geopolitical concerns have broadened as global leaders and diplomats attempt to forge agreements and try to encourage containment of the war. Meanwhile, losses continue to be absorbed by both Russia and Ukraine—amid debates across NATO about the monetary and political costs associated with supplying Ukraine with military equipment. As part of this backdrop, the U.S. has focused on keeping China from acquiring advanced semiconductor technology that can be applied to its expanding military buildup. We are not expecting the geopolitical backdrop to get materially better in 2024, yet history tells us that this risk alone is often not enough to derail opportunities in capital markets.

COMMODITIES OVERVIEW

With renewed expectations that the Chinese economy could be supported by a broad fiscal package, coupled with forecasts that many global central banks have completed their respective rate-hiking campaigns, the economic backdrop should remain constructive for oil demand. A potential widening of the Middle East conflict could send prices sharply higher amid tight stockpiles of crude and OPEC+ production cuts. However, should the global economy slow materially more than projected, crude demand may be somewhat offset. A more aggressive fiscal package from China, targeted for infrastructure spending, is a possible catalyst for industrial metals. Precious metals, especially gold, have seen prices rise amid heightened geopolitical and currency risk, and will garner further support in 2024 if the markets continue to consider those risks.

ALTERNATIVE OVERVIEW

After the strong recovery of the equity markets this year and the continued rise of short-term yields, markets have started to calibrate for the new market era. This new direction includes greater dispersion and volatility amid continued decoupling of global economic and policy actions, slowing economic activity, and rising geopolitical risks. All of this adds up to an environment that’s conducive for strategies that are nimble, can generate excess returns from both top-down macroeconomic forecasts as well as bottom-up fundamental analysis, have limited stock market sensitivity, and benefit from the rise in volatility. In our view, this could be an opportunity to own global macro hedge fund strategies as well as select private credit and infrastructure investments.

So where does that leave us for the first half of 2024?

We do expect the economy to soften mildly, which is what the Fed has been looking for over the past two years. The uncertainty surrounding a potential recession may limit stock gains as 2024 begins, but it could also provide a silver lining if the Fed eases rates as a result.

The rate and earnings cycles are likely to have a greater impact on stocks, as investors focus on the anticipated decline in interest rates and return of growth in earnings. With this in mind, we see growth opportunities in bonds, which should offer decent returns with lower risks compared to stocks. Ultimately, we expect both stocks and bonds to perform well and provide ample opportunities.

These are just some of the insights you’ll find in our Outlook 2024: A Turning Point. We're here to help you navigate this turning point and work toward achieving your goals. And at the end of the day, that’s what it’s all about.

Please reach out to Briana or Jeff if you have any questions or would like to discuss this further.

Briana Smith CLU® ChFC®

Director of Wealth Management

(262) 569-3631

briana.smith@lpl.com

Briana Smith has been walking clients through the financial planning process since 2014. She holds the Series 6, 63, 65 & 7 securities registration with LPL Financial along with her Chartered Life Underwriting (CLU®) designation.

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Jeff Taylor CFP®

Senior Wealth Advisor

(920) 262-2298

jeffrey.taylor@lpl.com

A graduate of University of Wisconsin – Stevens Point, Jeff has been in the financial planning industry since October 1997 and with LPL Financial since July 2006. In 2004, Jeff earned the CERTIFIED FINANCIAL PLANNER™...

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