Market Insights and Outlook for the New Year

Investors, anticipating a continuation of the year-end rally across global markets, were met with an unexpected turn as the first week of 2024 unfolded. Instead of a seamless extension, the opening session witnessed an unprecedented, synchronized downturn in both stocks and bonds, marking one of the most significant drops at the start of a new year. Although the initial day's performance may not definitively forecast the trajectory for the remainder of 2024, the coordinated retreat highlights a discernible hesitancy among investors to pursue a fourth-quarter surge that propelled US shares and long-dated Treasuries to remarkable gains exceeding 10%.

As we step into the new year, we'd like to provide you with a comprehensive overview of the market conditions and key factors influencing investment decisions. Here's a breakdown of the current landscape:

  1. Recap of 2022:
    • Unofficial recession with two consecutive quarters of negative GDP growth.
    • S&P 500 fell over -25.5%, and Nasdaq about -34%.
  2. Market Reversal in 2023:
    • 2023 witnessed a significant rebound, with the market now approximately flat compared to the start of 2022.
    • Bullish sentiment is high, with 2.5 bulls for every bear, indicating a potential contrarian negative indicator.
  3. Tech Stocks and Market Breadth:
    • Mega-cap technology stocks are extended with minimal upside.
    • The broader market rebounded in the 4th quarter, showing a straight-up pattern.
    • 71% of S&P 500 stocks trailed the overall market in 2023, a significant statistical divergence.
  4. Value vs. Growth and Geopolitical Risks:
    • Value is undervalued compared to growth, with smaller market caps offering attractive valuations.
    • Geopolitical risks are high due to passive policies and the approaching 2024 election.
  5. Bond Market and Federal Reserve:
    • Bond market rallied in the last two months of 2023, now fairly overvalued.
    • Federal Reserve hinted at rate cuts, but market expectations may be too aggressive.
  6. Economic Indicators:
    • 10-Year Treasury dropped to about 3.8%, influencing mortgage rates.
    • $6 trillion in money market funds, a record high, improving liquidity.
  7. Earnings Estimates and Market Valuations:
    • Earnings estimates for 2024 may be too high at $245 for S&P 500, up 11%.
    • Valuations suggest a P/E multiple of about 20x, with varied price targets for 2024.
  8. Market Conclusion and Strategy:
    • Looking for opportunities to pick off certain securities and sectors on a dip.
    • Cautious approach due to significant market risks; quality stocks with rotation potential are preferable.
    • Opportunities in the drug sector, especially in the obesity drug market.
  9. Outlook and Risks:
    • Market assumption for a soft landing; potential for inflation if a hard landing occurs.
    • Risk is high, back to 2022 levels; economy needs to be reasonably strong to meet earnings expectations.
  10. Investment Philosophy:
    • Short end of the bond market is attractive; stay short on the yield curve.
    • Consider higher dividend-yielding stocks with some growth potential over broad bond market exposure.

In summary, while we remain vigilant in monitoring market dynamics, it is currently prudent to exercise caution. We are actively exploring opportunities in specific sectors and will keep you informed as the market evolves.

As always, please don't hesitate to call or email with any questions.

Our Best Always,


Robert O'Braitis
Chief Investment Strategist

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