Eric: Hello everyone! Eric Haubert, Owner and Senior Financial Advisor and Registered Principal here at Katterhenry Investment Group of NEST Capital. Today, I’m joined with Brett Meiring, our Investment Strategist and one of our CFP’s on our team. We want to talk to you a little bit about the markets in 2023 and what we see things happening in 2024 and beyond. So, lets jump into it. For starters, 2023: pretty darn good year overall. Balanced portfolios, up about 11 and a half percent or so year-to-date, and if you’re in the more growth-oriented portfolios, up even more than that. ‘23 was an interesting year to say the least, abnormal in some ways, but overall on balance, pretty darn good year. Good news, if you are in our non-qualified or non-retirement accounts, to say that differently, even more good news. Because of our 2022 proactive account management, we harvested losses to use against future gains and we were able to offset many of those capital gains distributions in ‘23. So, more good news there. Talk more about the market if you will.
Brett: Yeah, Eric mentioned it was an abnormal year given that how concentrated the market was in 2023. There are 7 technology stocks that are more or less carrying the market that famously got nicknamed the Magnificent Seven. Now, the reason that they are carrying the market is because it was kind of hard to find growth elsewhere and then also too, the AI euphoria kind of took over the market. Now, that was kind of a problem for diversified portfolios like we invest in just because when you have concentration like that, you don’t have other assets carrying their weight. And that all changed in November when there was an inflation report that came well below expectations, and that kind of gave the market the impetus to start moving higher based on the assumption that the Federal Reserve is going to take their foot of the gas a little bit there. Now, that’s good for a couple reasons. Number one, just a mathematical reason, Eric, is when you have a lower interest rate, you can bring more future cash flows to present values, so that helps stock market valuations. But then number two, these companies can refinance their debt at a lot lower interest rate. And when you have non-tech companies that rely on more debt to finance their growth, like small-cap companies for example, that was a really big catalyst for them. So, the last couple months, you saw the rally broaden out a little bit, which makes 2023 end up a really good year. So, that’s more or less our thoughts around that. I believe you had some thoughts about 2024.
Eric: So, we jump into the 2024 conversation. Part of that rip higher in November and December of ‘23 means that we’re at a higher risk for short-term pullbacks. People taking profits. Makes sense, that’s just how the markets work. The good news about that, and we expect that to happen by the way, probably somewhat of a pullback here in the short run. We expect that, however, to be short-lived. And there’s lots of reasons why. One of the big ones: there’s still record cash on the sidelines. Money market rates from those increased rates of the Fed fighting inflation. Lots of money, record numbers on the sideline, that’s dry powder. And people will buy on the dips. We’ve seen that happen before, we think that will happen again. On balance, we expect stock prices at the end of ‘24 to be higher than where they are right now. That’s good for all of us that are investors. And we’ll take advantage of that in our portfolios.
Brett: Yeah, absolutely. If there’s an opportunity, we’ll definitely capture it there, Eric, like you mentioned. But yeah tying that to the bond market a little bit more then, too. We are expecting a decent amount of volatility within bonds. We saw that a lot last year, expecting the same this year. That does make it hard to gauge where we think yields are going to end up. Right now, our expectation is slightly higher. But, given the income you can now get on bonds, it’s finally something we haven’t seen for nearly 15 years like we said in plenty of meetings. But, because of that income buffer that we have, even if interest rates do move higher, that will reduce bond prices a little bit, but we have that income buffer to help offset that. So, in essence, we are expecting bonds to have a positive return this year and then, also too, the types of bonds, what we are expecting is that we do think we are going to see a little bit more yield curve normalization, where long term interest rates will start moving a little bit higher relative to the short end, where as the past couple of years, the curve has been inverted. So, that’s kind of what we’re thinking about the bond market there, Eric.
Eric: And that’s good news, it makes bonds a real asset class now and people can really…
Brett: Finally.
Eric: Yeah, finally. We haven’t seen that for a long time and that’s really good news for investors like us and investment advisors and managers like us too. So, we’re excited about that. 2024 as we all know, it’s an election year. Election years always lend themselves to volatility, you talked about that in the bond market. Overall, we’re going to see election year volatility this year. How does that normally play out? For starters, no election year is always the same as the last or the prior. This year, probably not much different than what we’ve seen. But in general, first half of the year looks pretty good, volatility in the third quarter leading up to the election. Uncertainty, markets hate uncertainty. Volatility ensues, the election comes along in the fourth quarter, that uncertainty leaves the markets, regardless of the winner, that uncertainty is out of the markets. And you see those markets head higher after the election is over. In addition to that, most administrations lend themselves to adding pro-market policies leading into the election. That’s typically a good story in an election year. So, we’ll see. But, it is an election year.
Brett: Yeah, exactly. And to Eric’s point, election years do on average have positive returns, but to the point of volatility you mentioned, that is a pretty good segue to our summary of how we think 2024 is going to unfold. We do think the stock market is going to be higher a year from now than it is currently. But with a little bit more volatility along the way than we saw last year. Bonds, we are expecting to have slightly positive returns again given that income buffer, and if we do see a pullback, we do think we will see a bit more than what we did last year, but we don’t expect to see anything significant. But, if that opportunity arises, we’ll take advantages in portfolios that we see fit to do so. And Eric, I think you had some final thoughts.
Eric: For sure, and I would say that 2023 was a perfect example of the philosophies you’ve heard from us for years, and it’s all about time in the market versus timing the market. And we are not market timers by any means, and we believe in diversification and we’ll continue to maintain that diversification in those managed portfolios that you all have been so kind to allow us to
help you manage. With that, we want to say a massive thank you to all of you. If it weren’t for you, we wouldn’t exist and that’s never lost on me or us. So again, thank you, have a wonderful year, and we’ll see you soon! Bye.