What’s the Plan, Stan?

Looking out my window, I see it’s snowing (finally) here in Buffalo, NY. I probably don’t have to tell anyone that’s unusual in these parts. Climate change or weather? You decide. In any case, we had a green Christmas in 2023 to go with green markets. How green, you ask?

S&P 500 Total Return Index 26.29%

Bloomberg U.S. Agg Bd 5.53%

Russell 3000 (TR) Index 25.96%

MSCI EAFE (Net Div) 18.24%

These are good numbers to be sure, but they obscure the fact that the averages are really only getting back to roughly where they were two years ago.

To the technically inclined, a lot depends on where we go from here. A failure to move to new highs can quickly turn the now bullish consensus into panicked cries of “Double Top!”.

It has been a frequent topic of conversation in the wilds of X (formerly Twitter) that if this economy is so good, why is everyone so downbeat? And, indeed, by the metrics of Wall Street, this is a very good economy. Unemployment below 4%, GDP growth in September of 5.2%, inflation falling from 9.2% to 3.1%, these kinds of numbers support the returns the markets provided.

And yet, in survey after survey, Americans report they are feeling downbeat. As a bartender once asked a horse at the bar, “Why the long face?”

One explanation is that inflation doesn’t poll well. People may be glad they’ve got a job, but they notice their paycheck doesn’t go as far as it did a couple years ago. A new home has become all but unaffordable for many. For those who own assets and have money in the markets or even the bank, things are pretty good. For those who don’t, not so much. In case you were wondering, there has never been a time that wasn’t true. In any case, the downbeat American consumer has not stopped spending like she’s going to the chair.

Turning the page to 2024, where do we go from here? Our Outlook is for a gradual deceleration in the economy culminating in a mild recession in the second half of the year. This would likely be accompanied by Fed rate cuts. I would think that would not bode well for the incumbent in the election if that were to be the case. Meanwhile, an increasingly chaotic international situation certainly has the potential for disruption.

Here are a few stories that bear watching:

First, AI, or artificial intelligence. This was the overarching theme to drive the market in ’23, and it is not going away. I saw today that Dell is introducing a new laptop keyboard with an AI button built in. Like any tool that increases human capability, it may be used for good or evil. Expect plenty of both. Second level thinking would suggest there may be investment opportunities among the users of AI as this amazing technology gets put to work.

War (what is it good for?). Well, it might be good for companies that sell weapons…

Energy. (See War). Also, after fifty years and trillions of dollars invested in “clean” energy, human civilization is utterly and completely dependent on oil and gas to survive. That might be investable.

Weight loss drugs. Health care in general. The skeptic in me is waiting for the other shoe to drop on weight loss drugs. They cure obesity, addiction, diabetes, heart disease? Seems a little too good to be true. But it seems to be working for now. On the other hand, many health care stocks that are not related to semaglutide are very cheap with good dividends.

The Election. Oh yea, it’s an election year. This one might go a little differently than previous ones. You’ll read everything from the “end of democracy” to “the most important election of our lifetime” (Don’t they say that about every election?). I’m not going to pretend that this election is not potentially explosive. They all are. Two thoughts: One; in my experience, people tend to overestimate the importance of politics to the markets and the economy. It’s not that they have no effect, it’s just that politics is only one of many factors influencing markets, and many issues that are of high importance in politics have little to no effect on markets. Two; it’s rarely the expected event that disrupts the markets, it’s generally the surprise ones.

There is one overriding issue alongside which all others shrink to insignificance: Will the Buffalo Bills win the Super Bowl? Tune in next month for the answer.

The S&P is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.

The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar denominated, fixed-rate taxable bond market.

The Russell 3000 Index measures the performance of the 3,000 largest U.S. companies based on total market capitalization, which represents approximately 98% of the investable U.S. equity market.

The MSCI EAFE (Europe, Australasia, and Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States & Canada. The EAFE consists of the country indices of 22 developed nations.