Looking back, it’s clear that despite all the challenges the market faced, 2023 was a solid year for financial assets. These include the failure of several large banks, pressure for higher interest rates in areas such as commercial real estate, the ongoing conflict between Russia and Ukraine, and renewed tensions in the Middle East between Israel and Hamas militants. This includes conflicts.
We believe market expectations are optimistic for 2024. As of early December, markets were pricing in expectations that the Federal Reserve would cut interest rates by 1 percentage point next year, inflation would fall to 2%, and S&P 500 profits would rise 11% starting in 2023. This level will be indicative of the price. /Rate of return19.
We believe the market is weighing the following narrow scenarios: 1) Inflation falls, 2) Recession is avoided, 3) Artificial intelligence grows into hype, and 4) The delayed effects of rising interest rates will not materialize; 5) geopolitical tensions will remain subdued;
Inflation is priced to fall from about 3% today to 2.1% in 2024, but we believe it is unlikely to fall as much as the market believes absent a recession. As a result, the chances of a rate cut without a recession are less likely than the market thinks. We also believe that a recession is much more likely than the market thinks.
AI is certainly the buzzword of the year. Its potential to improve productivity is huge, and we at GenTrust strongly believe in its long-term power. AI will impact nearly every industry, from manufacturing to hospitality to healthcare. Similar to the early days of the internet, AI’s biggest use cases may still be unknown.
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In the long term, AI is a game changer, but the short-term pricing of some AI stocks is reminiscent of the 1999 tech bubble. The main beneficiaries of the hopes associated with the AI revolution are the so-called Magnificent Seven stocks.microsoft
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Meta
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Amazon
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apple
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tesla
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Alphabet (Google), and Nvidia
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The group as a whole is up more than 100% on average this year and now accounts for nearly 30% of the S&P 500. Although all of these stocks performed well in 2023, the drivers and expectations within the group vary widely. For example, Nvidia is expected to see its revenue grow more than twice as much next year and its EPS increase by 268%. Anything is possible, but it usually makes sense to bet on something that’s priced this perfectly.
The impact of rising interest rates will vary by sector, with different lags. Some asset classes, such as U.S. small-cap stocks and commercial real estate, appear to have priced in most of the impact of rising interest rates. On the other hand, other markets, such as the broader credit and equity markets, do not take into account the possibility of future increases in funding costs.
Many elections will be held around the world in 2024, and although geopolitical tensions remain high, we do not think they will have a major impact on the market.If a recession occurs, foreign countries may become more aggressive toward the United States.
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In summary, we believe the probability of a recession is higher than the market thinks. While some markets, such as U.S. small-cap stocks and commercial real estate, appear to have priced in most of the impact of rising interest rates, others have priced in less.
As a result, we will be overweight bonds and underweight credit in 2024. We are underweight stocks, with a preference for small-cap stocks. We are underweight real assets.
jim besaw He is the Chief Investment Officer and Co-Founder of GenTrust, a Miami-based RIA with offices in New York and Puerto Rico. Before co-founding GenTrust, he worked at Element Capital, where he managed a fund that ranked him No. 4 on Barron’s Top 100 Hedge Funds. He was head of US dollar bond options trading at Barclays Capital. Prior to joining Barclays, he was head of US dollar bond options trading at JPMorgan. Besaw is his CFA certified.