Amerant of Interest

In this report, we take a look at some key drivers and predictions for markets in 2024.

We remove our U.S. recession prediction, but reiterate that U.S. growth is slowing down
Other highlights include the Fed starting to cut rates, U.S. presidential election noise ramping up, geopolitical risks staying elevated, and strength in equities broadening beyond tech
For 2024, our top piece of advice reflects this view: stop chasing last year’s winners and focus on opportunities in industries, names, and markets that have underperformed up to now, as we expect the market rally to broaden out in the year ahead.
In short, focus on the trees and not the forest!

Source: pixabay.com

We usher in 2024 with a new publication, our annual outlook. We have chosen to provide these thoughts in short bullet point format, relying on charts to make our point wherever possible. We emphasize that our 2024 outlook thoughts are focused on high-level trends, and should not be considered recommendations. We encourage clients to reach out to their representative to discuss these themes and how they can be tailored to their specific investment needs and circumstances.

2023: FOMO Rules
2023 was a year in which it was hard to lose money: global equities, fixed income, and cash were all positive for the year. Still, the most common conversation we have with clients these days is, “Why didn’t I make more?” as the FOMO trade for mega-cap tech names drove investors to chase the winners and question whether high-single-digit portfolio returns were sufficient.

Looking ahead to 2024, we advocate taking some chips off the table for clients that benefited from the megacap tech rally. For those that didn’t, we emphasize the prudence of maintaining a diversified, balanced portfolio over the long term.

2024 Look at the Trees, not the Forest
For 2024, our top piece of advice reflects this view: stop chasing last year’s winners and focus on opportunities in industries, names, and markets that have underperformed up to now, as we expect the market rally to broaden out in the year ahead. In short, focus on the trees and not the forest. With that, Happy New Year and let’s kick off our 2024 outlook ideas!

1. Don’t Fight the Fed

One of the most often repeated clichés on Wall Street is there for a reason: it’s usually right
The Federal Open Market Committee (FOMC) membership changes slightly this year, but we expect it to remain relatively balanced between “Hawks” and “Doves”

Based on recent projections and commentary, we believe the Fed will start cutting rates sometime in 2024; markets are pricing the first cut in March
Markets are pricing in a greater magnitude (-150 bps by YE24) than the Fed has guided to (-75 bps) or that we expect, but we do agree that the Fed funds rate will be lower by year-end than it is today (5.25%-5.5%)
We looked at years the Fed has cut rates since 1980; in every case, bond market returns were positive
For equity market returns in those years, it matters why the Fed is cutting rates: to cushion a market crisis/recession (2001-02, 2008, 2020), or simply to bring rates back to neutral (1996, 1998); in the former, equity markets tend to be lower for the year, but can be positive in the latter scenario
We highlight in green all years since 1980 when the Fed funds rate declined for the calendar year, as well as the amount of the cuts and the accompanying total return for the S&P 500 and the Aggregate

2. Soft Landing: Mission Accomplished?

We admit that we were skeptical of the Fed’s ability to achieve a “soft landing” for the economy given the aggressive pace of rate hikes in 2022; our base case for 2023 was a mild recession
In the event, the U.S. economy chugged along at a strong clip; for 2024, we remove our recession call
Inflation metrics remain too high to declare victory, especially as “Supercore” PCE clocked in at 3.5% in November; nevertheless, substantial progress has been made back towards 2% goal

Nonfarm payrolls creation have shown a slowing trend, but still positive, just as would be expected in a soft landing
GDP is also coming off recent highs and should settle in the 2-2.5% range for 2024
Declining inflation + slower payroll growth ≠ negative GDP print = SOFT LANDING
We also note that the Fed has thus far avoided triggering the Sahm rule, which states that when unemployment rises by at least 0.5% from its cyclical low, we are in a recession

3. Record High on the S&P?

The all-time high on the S&P 500 was 4,797 on January 3, 2022, then the index fell as low as 3,577 in October 2022, before climbing back up through 2023 to above 4,700 as of this writing
Of 19 Wall Street forecasters, the highest is 5,200 and the lowest is 4,200, implying a range of up +9% and down -12% from year-end 2023 levels
The natural bias is for equity markets to go up over time, as earnings are priced in nominal dollars; if inflation is in the range of 2-3%, earnings should rise by that much even if nothing else changes; in practice, companies gain efficiencies and consistently deliver average annual earnings growth in the high single digits

Despite a soft start to the year, we note that record cash in money market funds and positive earnings expectations could drive the S&P to hit new highs in the next 12 months
However, we note that the S&P is heavily weighted towards the mega-cap tech names, and, as we discuss below, we encourage clients to look beyond the broad index for the year ahead

4. Look Beyond Tech for Value

The S&P index was up over 25% in 2023
That performance was driven by the “Magnificent Seven” (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla): these seven stocks more than doubled in 2023
The equal weight S&P, which does not weight stocks by their market cap, was up “just” 12% for the year

For 2024, we see tech valuations as stretched, so we encourage clients to consider equities away from the tech sector
For additional perspective, take a look at the combined market cap of the Magnificent Seven versus the Nikkei, London Stock Exchange, and Toronto Stock Exchange: they are nearly equal
The point is simple: we believe investors should consider buying equities away from the megacap names, which are already reflecting their superior growth prospects
We prefer Value to Growth, with a focus on higher quality and dividend paying equities; we also prefer small and mid-caps for 2024

Sectors we like include Energy, Financials, Utilities, and Consumer Staples, all of which rose by less than the high-flyers in 2023 and have room for appreciation

5. Election Year in Focus

The U.S. presidential election takes place in November, and we expect the race to dominate the popular press for most of the year
The New Hampshire primary is January 23; Super Tuesday is March 5, with primaries in 14 states, including California and Texas
We have no political predictions, but we do note that, since 1980, the average return on the S&P 500 in an election year is 5.3%; the median return is even higher at 7.3%, as the average is negatively impacted by the -22% return in 2008
Since 1980, bond returns have never been negative in an election year; obviously, this has been helped by the long term trend for lower rates, but nevertheless shows that bonds are typically positive in election years

With the Fed expected to start cutting rates in 2024, we see no reason to disagree that usual election year patterns will hold again for 2024: higher equities and positive total returns on bonds

6. Cash is No Longer King

In 2022, cash/short-term treasuries returned1.5%, which was the only positive return among major fixed income and equity indexes
Despite improving returns for cash in 2023, to 4.5%, the asset class lagged every major fixed income and equity index

With the Fed likely to cut rates in 2024, returns on cash are likely to head back down to low single digits
Cash is rarely the best asset class for longer-term investing
We encourage clients to break their “t-bill and chill” habit by extending duration into intermediate or long end bonds

7. Watch for A Bull Steepener

We expect that the yield curve may “bull steepen” in 2024: short and intermediate rates may fall by more than the long-end of the curve, leading to a flattish, or uninverted, yield curve

This could occur as the U.S. Treasury continues to increase coupon issuance and markets focus on the substantial U.S. debt burden; demand from key buyers, such as U.S. banks and Asian central banks, could also remain muted: these factors could keep the long-end relatively higher
The Fed cutting rates should be positive for the very short-end of the curve as well as the policy-sensitive 2Y
In a bull steepener scenario, the best part of the curve to capture price appreciation from lower rates is intermediate maturities from 2Y to 10Y
However, for most clients, we continue to advocate adding duration to take advantage of relatively attractive long-term rates

8. Consider Alts and Privates as Real Estate Bottoms

Commercial property values in the U.S. have declined as a result of higher interest rates and weaker occupancy rates, especially in office
The Green Street Commercial Property Price Index (CPPI) index level is down to 121, after peaking at 155 in mid-2021

Commercial property “capitalization rates” moved higher as the Fed raised rates; with the Fed likely to cut rates in 2024, property values should begin to find support
We introduced access to private market investments in 2023, and we note that Real Estate options could be attractive for investors with longer term investment horizons and ability to tie up capital for some period of time
Publicly traded REITs may also offer cheap valuations and high dividend payouts vs. other sectors; office and retail sector properties remain weak, while industrial and multi-family have performed better

9. Geopolitical Risks Remain Elevated

Wars are being fought in the Middle East and Russia/Ukraine
Tensions between U.S. and China remain elevated, although there have been some hints of thawing since Biden and Xi met in November
Although there have not been notable impacts on U.S. markets from these global tensions, one clear beneficiary of the rising geopolitical tensions elsewhere in the world is Latin America
In 2023, imports from Mexico were higher than imports from China for the first time since 2000
The U.S. decision to relax sanctions on Venezuela was also likely a response to threats to oil supply from other regions
We continue to like LatAm corporate bonds, as spreads are elevated compared to other geographies, and risks

10. LatAm Economies Stay on Track as Central Banks Lower Rates

Latin American economies performed rather well in 2023, as they had raised rates sooner and higher than in the U.S., to combat inflation
LatAm banks have already begun their easing cycle, acting ahead of the Fed again
Colombia and Brazil’s central banks are have already started the easing cycle, while Mexico’s central banks is likely to cut rates in 2024
LatAm economies are export-oriented and the “soft landing” scenario for the U.S. is positive for these countries

Definitions, sources, and disclaimers

Definitions:

Gross Domestic Product (GDP): A comprehensive measure of U.S. economic activity. GDP is the value of the goods and services produced in the United States. The growth rate of GDP is the most popular indicator of the nation’s overall economic health. Source: Bureau of Economic Analysis (BEA).
GDPNow is not an official forecast of the Atlanta Fed. Rather, it is best viewed as a running estimate of real GDP growth based on available economic data for the current measured quarter. There are no subjective adjustments made to GDPNow—the estimate is based solely on the mathematical results of the model. In particular, it does not capture the impact of COVID-19 and social mobility beyond their impact on GDP source data and relevant economic reports that have already been released. It does not anticipate their impact on forthcoming economic reports beyond the standard internal dynamics of the model.
The Current Employment Statistics (CES) program produces detailed industry estimates of nonfarm employment, hours, and earnings of workers on payrolls. CES National Estimates produces data for the nation, and CES State and Metro Area produces estimates for all 50 States, the District of Columbia, Puerto Rico, the Virgin Islands, and about 450 metropolitan areas and divisions. Each month, CES surveys approximately 142,000 businesses and government agencies, representing approximately 689,000 individual worksites. Source: Bureau of Labor Statistics (BLS).
Initial Claims: An initial claim is a claim filed by an unemployed individual after a separation from an employer. The claimant requests a determination of basic eligibility for the UI program. When an initial claim is filed with a state, certain programmatic activities take place and these result in activity counts including the count of initial claims. The count of U.S. initial claims for unemployment insurance is a leading economic indicator because it is an indication of emerging labor market conditions in the country. However, these are weekly administrative data which are difficult to seasonally adjust, making the series subject to some volatility. Source: US Department of Labor (DOL).
The Consumer Price Index (CPI): Is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. Indexes are available for the U.S. and various geographic areas. Average price data for select utility, automotive fuel, and food items are also available. Source: Bureau of Labor Statistics (BLS).
The national unemployment rate: Perhaps the most widely known labor market indicator, this statistic reflects the number of unemployed people as a percentage of the labor force. Source: Bureau of Labor Statistics (BLS).
The number of people in the labor force. This measure is the sum of the employed and the unemployed. In other words, the labor force level is the number of people who are either working or actively seeking work.Source: Bureau of Labor Statistics (BLS).
Advance Monthly Sales for Retail and Food Services: Estimated monthly sales for retail and food services, adjusted and unadjusted for seasonal variations. Source: United States Census Bureau.
Federal Open Market Committee (FOMC): Responsible for implementing Open market Operations (OMOs)–the purchase and sale of securities in the open market by a central bank—which are a key tool used by the US Federal Reserve in the implementation of monetary policy. Source: Federal Reserve.
The Federal Funds Rate: Is the interest rate at which depository institutions trade federal funds (balances held at Federal Reserve Banks) with each other overnight. When a depository institution has surplus balances in its reserve account, it lends to other banks in need of larger balances. In simpler terms, a bank with excess cash, which is often referred to as liquidity, will lend to another bank that needs to quickly raise liquidity. Source: Federal Reserve Bank of St. Louis.
The “core” PCE price index: Is defined as personal consumption expenditures (PCE) prices excluding food and energy prices. The core PCE price index measures the prices paid by consumers for goods and services without the volatility caused by movements in food and energy prices to reveal underlying inflation trends. Source: Bureau of Economic Analysis (BEA).

Sources: U.S. Bureau of Economic Analysis (BEA), Bureau of Labor Statistics (BLS), U.S. Department of Labor (DOL), Federal Reserve, Federal Reserve Economic Database (FRED), Federal Reserve Bank of Atlanta, U.S. Census Bureau, Department of Housing and Human Development (HUD), U.S. Department of Agriculture, U.S. Energy Information Administration (EIA), U..S Department of the Treasury, Office of the United States Trade Representative (USTR), U.S. Department of Commerce, data.gov, investor.gov, usa.gov, congress.gov, whitehouse.gov, U.S. Securities and Exchange Commission (SEC), Morningstar, The International Monetary Funds (IMF), The World Bank (WB), European Central bank (ECB), Bank of Japan (BOJ), European Parliament, Eurostats, Organization for Economic Co-operation and Development (OECD), National Bureau of Statistics of the People’s Republic of China, Organization of the Petroleum Exporting Countries (OPEC), World health organization (WHO).

Financial Markets – Monthly and YTD returns (Table): Asset class performance is in USD and refers to the following indices: Equities: US Large Caps (S&P 500), Emerging Markets (MSCI EM), Europe (MSCI Europe), Japan (MSCI Japan). Fixed Income: 10-Yr. US Treasuries (BofAML US Treasury Current 10-Yr.), Emerging Markets Sovereign (USD) (JPM EMBI Global), US High Yield (BofAML US HY Master II), US Investment Grade (BarCap US Aggregate Bond), and Developed Markets Sovereign (excl. US) (JPM GBI Global Ex US). Source: Morningstar.

Important Disclosures:

The views contained herein are not to be taken as advice or a recommendation to buy or sell any investment in any jurisdiction, nor is it a commitment from Amerant Investments, Inc. or any of its affiliates to participate in any of the transactions mentioned herein. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit and accounting implications and determine, together with their own professional advisers, if any investment mentioned herein is believed to be suitable to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.

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Amerant Investments 2024 Outlook: Look at the Trees, Not the Forest