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There are just a couple of days left until Christmas and only a week before 2023 is behind us. My dad likes to say, “another year shot to hell.” I think he says this gratefully, but maybe I’m being optimistic.
This year, the equity market performed a lot like my beloved UCONN Huskies basketball team during their championship run back in March. Both began with a scorching hot start but found themselves struggling and stringing together losses, in the middle of the year. This left folks wondering whether it would be a special season or simply pretend. The final chapter for both equities and the Huskies was a torrid finish that erased any doubts in the mind of skeptics.
UCONN hung another banner in their arena in Storrs, CT. However, the problem with markets is that the season is never over. Investors don’t really get much time to rest and recover.
I write this while on a plane to Brazil to spend Christmas with my wife’s family. I’m blessed to have them as in-laws but it’s never easy spending the holiday away from my own family in New Haven, CT.
Christmas Eve is also the best eating day of the year. As an Italian family, we always do the “Feast of the Seven Fishes.” Though I won’t partake this year, my mind always comes back to the same questions. Why seven? It’s still debated. Why fishes and not fish? I also don’t know.
It doesn’t really matter what fish you serve, just as long as there are seven. For us it is typically tuna fish in oil with the antipasto, lobster and crab in the fish sauce for the homemade pasta, scallops, calamari, baccala (cod), and baked stuffed shrimp. We’d always have an emergency tin can of sardines in case someone forgot a fish and we needed a seventh. It counts!
The funny thing is, eating fish on Christmas eve is supposed to represent a sacrifice of not eating meat until Christmas day. But typically, at the dinner table on December 24th, the food is so amazing that the only thing I’m sacrificing is my ability to fit into my bathing suit when I come back to our home in Miami.
In honor of the seven fishes that I will miss, we’ve put a list together of seven things to have on your radar in 2024.
1. The Election
It doesn’t need to be said that the 2024 election has the ingredients to look like the first 15 minutes of Saving Private Ryan. CHAOS. Maybe an exaggeration but the markets hate uncertainty and there’s a lot of it going around this election cycle. We aren’t certain if new candidates will emerge and who – in fact – will be able to run. Whoever wins will likely have an impact on taxes, the cost of policies and world order. These are trying times and people have a laundry list of concerns. This level of uncertainty can produce tons of anxiety. As campaigning gets into full swing and candidates swap momentum, the market will ebb and flow accordingly.
2. Federal Reserve Policy
It seems like decades that the FEDS impact on the economy is more impactful than policies of those in office. The Federal Reserve is independent from political meddling. However, the timing of chair Powell’s declaration of no further rate hikes and the potential of three or four cuts in 2024 is fodder for the cynics. Bailouts, political favors, or legacy building. You name it, we’ve heard it. What we know for certain is that these comments were the equivalent of lighting a match to risky assets – catching fire on their way to solidifying a monster year, equities in particular. Sure, inflation has come down a bit but cutting too much too fast could potentially put us back in a similar scenario we felt in 2022. This is something to watch for as the market seems to be pricing in perfection.
3. Don’t Sleep on Bonds
It’s a little concerning how many folks are asking to increase their equity exposure this past week, confident we’ve achieved a soft landing and hoping to squeeze out a bit more. Of course, investors are coming off the back of a large pop in equities but let’s not forget about the opportunity bonds offer. There’s no shame in earning nearly 6% in high grade corporates with the added bonus of duration. Which is to say, if rates do fall, the prices of the bonds you hold will increase. I know it’s hard to believe because bond funds have had negative returns over the last 3 years but that’s exactly what happens when rates go in the opposite direction!
4. Volatility (VIX Index)
The VIX is the volatility index. It captures the market’s expectation of 30-day volatility or fear. The higher the VIX, the higher the Vol. and fear in the market. Well, the VIX hit a 4-year low a week ago signaling that all is quiet on the western front. Potentially the calm before the storm. With little landmines of risk scattered throughout the market it feels like the VIX is a sleeping giant. The VIX levels spent a week in the 12s and is now at 13.8. The average level was about 17 in 2023 and mid to high teens is a definite possibility for 2024 even with a soft landing.
5. (Commercial Real Estate & Student) Loans
Commercial Real Estate has been in trouble for months with no end in sight. The fate of the industry is in question. Keys are getting handed back to the banks as sky high rates have crippled even the best class A properties. And since the sector is mostly made of office buildings and retail, the effects of hybrid working arrangements have caused a spike in vacancies, reduced rent rolls and a mountain of losses. It’s a tough double act. Since it’s not so simple to repurpose an office into something else, this story will continue to unfold. Distressed commercial real estate for sale is at highs not seen in over a decade.
The other proverbial shoe, student loans, has been back on the table since October. May not be news to everybody but the kicker is that 9 million people failed to make their monthly payments since the grace period ended. Which means that 40% of the 22 million borrowers just didn’t pay. However, interest continues to accrue even though students are forgiven of delinquency until the start of 2024.
6. Artificial Intelligence (A.I.)
The Artificial Intelligence & Technology ETF (AIQ) was down -36.5% in 2022 and now in 2023 it is up 55%. Nvidia was down 50% in 2022 and is up 235% this year. That is not a typo. LLMs, ChaptGPT and Google’s Bard, have potential to drive a boom in the generative AI market in the next decade. Meanwhile, the impact it’s had on areas like healthcare and education has only begun to scratch the surface. As an investor, it’s important to distinguish between the real players in the space and the pretenders. Look no further than the dotcom era. At any given time, there are a host of several competitors making compelling cases, taking market share, and delivering amazing products. It’s increasingly winner-take-all and we forget that no company is pre-ordained.
7. Home Prices
This is for millennials mostly. The question comes up often “should I buy or rent.” With home prices still so high and mortgage rates at uncomfortable levels, it’s likely not the time to force a home purchase. Intuition might tell you that with mortgage rates at 7% and home values at all-time highs would suggest potential price drops. However, if you locked in mortgage at 2-3% several years ago, are you really going to sell your home unless absolutely necessary? How do you justify such a large increase in your monthly cost? It’s a conundrum. Folks want the American dream or feel the pressure from society, but the math is just not mathing – as the kids say. We are in a rare period where renting for many makes more sense than buying. And that is simply comparing rent to P&I. Remember, renting eliminates maintenance costs that have doubled or tripled for a large swath of the country. Don’t get me started on the prices I am seeing at Home Depot- my home away from home.
We want to wish everyone the happiest of holidays. Hopefully a time of rest and relaxation with your loved ones. Be well, and we will see you in the New Year.
Disclosures:
The information contained in this newsletter is provided for informational purposes only, and should not be construed as investment advice or a recommendation to purchase or sell a security. Investing involves the risk of loss that clients must be prepared to bear. This document contains forward-looking statements of opinion, belief, and expectation about the future. Actual results could differ materially from such statements and our opinions are subject to change without notice.