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What to Expect in the Year Ahead

Published on December 29, 2023

Peter Mallouk
President & CEO
Jonathan Clements Headshot

Jonathan Clements
Director of Financial Education

With the markets experiencing a significant rebound in 2023, many investors are wondering what lies ahead. Join Peter and Jonathan as they dissect the economic landscape heading into 2024, from the Federal Reserve’s surprising moves to the evolving role of inflation. Plus, gain insights into when and how to rebalance your investments during a market recovery.

Hosted by Creative Planning Director of Financial Education, Jonathan Clements, and President, Peter Mallouk, this podcast takes a closer look into topics that affect investors. Included are in-depth discussions on financial planning issues, the economy and the markets. Plus, you won’t want to miss each of their monthly tips!

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Jonathan Clements: This is Jonathan Clements, director of Financial Education for Creative Planning. With me is Peter Mallouk, President of the firm, and we are Down the Middle. In many ways, the past year has been the mirror opposite of the year before. The stock market sectors that got hit hardest in 2022 have come roaring back in 2023. But what can we expect from the year ahead? Peter, it seems many folks are waiting on the Federal Reserve looking for them to cut interest rates. The Fed doesn’t seem to be in any rush to do so despite slowing inflation. What do you think is going on? Is investors’ intense focus on the Fed mistaken?

Peter Mallouk: Well, I think the last Fed meeting was just fascinating because everyone saw the numbers going in, that inflation was still real, it was still happening. We still have inflation, but it was decelerating. It wasn’t going up as fast as it was. The Fed, part of its mandate is to have modest inflation. They partially exist to have modest inflation, which two to 3%. And we were getting back closer to that range. And so a lot of people thought, “Hey, the Fed by raising rates slowed down the economy, less people buying houses, less people buying cars, businesses,” and so on. And they did it without causing a recession, which is a minor miracle, what we call a soft landing. So when the Fed said they were not going to raise rates, no one was surprised. They expected them to say they weren’t going to raise rates.

They saw that inflation was decelerating, but then the Fed, they went on one extra step and said, “We anticipate reducing rates three times in 2024.” And that really took the market by surprise. No one really expected them to be that aggressive about reducing rates. And you could make a bearish case that they see a recession coming and they’re looking at the data and things look bad and they want to get in front of it, or you can respond the way the market responded, which is, “Wow, we accomplished the soft landing. We don’t have high inflation, we still have low unemployment. Earnings are probably going to be really strong. The carrying cost of debt is going to be lower for all these companies. We’re going back to a Goldilocks economy where everything is perfect all of the time,” and the market really came roaring back. You particularly saw companies that are more interest rate sensitive, like small companies do really, really well.

And I think the economy’s not working beautifully when investors have to look at the Fed all the time. So to your question about, “Hey, should they really be paying attention to the Fed?” In this environment, yes. We dramatically lowered interest rates after COVID and too much and the economy was on fire. Then we dramatically increased rates at a record pace to slow things down. And so yeah, that has a very, very big effect on the economy. But we might be heading into a world where the Fed is not the headline, where there’s a stabilization of interest rates and the headline is going to be corporate earnings and oil prices and wars across the world and unexpected events that we never know what’s going to happen and when it’s going to happen like a cyber attack or something like that. So I think we’re finally going to be entering a world where it’s not about the Fed all of the time.

Jonathan: So let me ask you this question, Peter. It’s a question that I’ve been thinking about. Given what the Fed did at the last meeting, are you surprised that the stock market reaction wasn’t more exuberant? We aren’t yet back to where we were in early 2022.

Peter: It’s really interesting. I think that’s true. I think that if you look at the last two years basically we went down a lot and then we came up a lot and it’s a whole lot of nothing over two years. It’d be a lot more boring if we just saw that the market was up 1% over 24 months. A lot of indexes are not back to all time highs, but it was a heck of a boomerang and it could just be the beginning. We’ve only had that announcement out for a few weeks. The stock market has had massive gains in just a couple of weeks and nothing says it’s going to stop in early 2024. I look at the stock market, the way the housing market reacted. Interest rates dropped a lot. Everyone was buying homes every size, every price point everywhere in America.

And as rates rocketed, everyone stopped buying homes at the same prices. Every price point in every market across America, you saw even markets like Austin decline 20%. Well, now we’re in a world where which market you’re in housing and what price point you’re in and what the neighborhood is like is going to matter a lot more than the Fed. I think it’s going to be the same thing with stocks. And I think a lot of different parts of the markets, small caps, mid caps, overseas stocks, have a long way to go and the market still has a lot of uncertainty, obviously holding it back a little bit, but they have a long way to go to the upside before they get to where they could be.

Jonathan: So let’s pivot and talk about longer term returns, what we can expect over the next decade. One of the narratives that’s been out there in recent months is that bonds could potentially rival the returns of US large cap stocks over the next decade. Particularly people are talking with some excitement about both high quality corporate bonds and high yield corporate bonds. Do you think we’re really in a world where we could see returns from large cap US stocks that rival those of corporate bonds?

Peter: I think that is ridiculous and I don’t think we’re in that world. And I think over 10 years stocks will probably earn double what bonds do before taxes and much better than double on an after tax basis. I’m curious your thoughts on this topic, Jonathan.

Jonathan: Well, one of the things that we’ve talked about a lot, and we certainly aren’t alone on this, is this disparity in market performance. How large cap US stocks have performed so differently from small cap stocks, have performed so differently from developed foreign markets and from emerging markets. So when I hear this story, do I think it’s true? Do I think that people were really expecting corporate bonds to do better than large cap stocks? Probably not. Why would you take the risk with large cap stocks if you thought that was the case?

But the fact that people are framing the issue in terms of large cap US stocks tells me that the outlook for small cap stocks for emerging markets and for developed foreign markets is much brighter for the decade ahead. Now, we’ve been saying that for multiple years because that’s what the valuations are telling us. Nonetheless, it’s yet another indication that maybe finally this is going to be the case. So Peter, just 14 months ago, the stock market started to rebound. So if history is any guide, this rally is really in its early days and 2024 should be an okay year. Assuming that’s the case, what should investors be doing about the year ahead?

Peter: Well, I think that if you look at the last two years was a microcosm of being a strong long-term investor, how much you get rewarded. And if you had a taxable account and you were passive, you’re mainly indexed, you did better than the active stock pickers, if you tax harvested it was a bonanza. There were a lot of opportunities to tax harvest over the last couple of years. And if you were continually buying into the market with every paycheck, every bonus, every inheritance, every whatever, you were incredibly rewarded for it because you were doing most of that buying off of the all-time highs. I think investors the last two years and coming out of COVID and ’08, ’09 and everything in between to me is just an incredible case study. The second-biggest drop in stock market history in ’08, ’09, the fastest 34% drop in history with COVID, one of the longest, most boring bear markets in history over the last couple of years.

An incredible example for the long-term investor to focus on their specific goals, have their investments match their goals, have enough bonds to cover you for five years, seven years if you’re very aggressive, maybe less than that, have enough stocks to cover you for 10 years. If you’re willing to deal with complexity, a little bit of uncertainty, some illiquidity in exchange for maybe getting a few more percent return, then you would do your illiquid private investments for 10 years plus. And if you do those things and you take advantage of the drops in the market to rebalance into weakness and you tax harvest, you are going to win. Winning being, being in the top 10% to 25% of investors and you’re going to have a net loss about once every four years. And if you could accept that, that once every four years you’re going to be down, three out of four years you’re going to be up, and stick with that plan the last couple of years, COVID, ’08, ’09 and everything in between is evidence that that works.

Jonathan: So for the last couple of years, if you followed good investment practices, you did dollar cost average, you did take tax losses, you did rebalance, you have indeed done well. Assuming that 2024 is a continuation of this rally, at some point the rebalancing should go the other way. You should be lightning up on stocks and moving back into bonds. I’m asking you a tactical question here, Peter, and you’ll probably send me a nasty email after, “Why did you ask me that question?” But should people be slower to rebalance given that we are in the recovery phase? They shouldn’t be too quick to head back to their, as their stocks balloon as a portion of their portfolio, rebalance back into bonds.

Peter: I agree wholeheartedly, and I’ll give an example. If a client’s 70% stock, 30% bonds and they were withdrawing, they’re in retirement, they’re withdrawing, during that bear market, we were giving them the money from the income of their portfolio and their bonds. Their bonds actually declined as a percentage of the portfolio from 30% to maybe 22, 18%. We were in no rush to rebalance back. We wanted to get the market recovery. And only now are we even starting to look at going back. I am not a believer in being a strong adherent to a strict asset allocation policy.

We know that there are corrections in bear markets in these spaces and give them time to recover and go on to new highs before you go back and rebalance. And there is a tactical element to that. It always works. The question is how long is it going to take, right? Is it going to be six weeks, is it going to be six years? And you have to have enough bonds that no matter what happens, you can continue to maintain your lifestyle. But other than that, I’m a big fan of waiting for a full recovery, new market highs and feeling like we’ve gotten the fair value back out before we rebalance.

Jonathan: All right, Peter, so it’s that time of the podcast. What do you have for your financial wellness tip of the month?

Peter: Okay, so a lot of people when they’re contributing to 401(k) contribute the same amount every paycheck, whether it’s every two weeks or every month or whatever. And I think this misses an opportunity because if you’ve got the ability to front load the 401(k), if you put say a certain amount of money in your 401(k) over a whole year, over the long run, you’re going to earn less than if you put it in the first paycheck. Because if you put it in the first paycheck, it’s got longer to grow.

And so if you do that every year, you front load, you’re still dollar cost averaging, you’re just doing it every January instead of a little bit every month throughout the year. So I encourage everyone that’s got a 401(k) to contribute as much as they can upfront that they can maintain their lifestyle, contribute as much as you can upfront. Now, the one caveat is that if there’s a match, you can lose part of the match by doing this. You want to get with your HR director and make sure like, “Hey, how quick can I put my money in this 401(k) and not lose the full match?” How about you, Jonathan?

Jonathan: So Peter, as we’ve often talked about in the past, you don’t want to leave too much cash sitting in your regular checking account because more than likely you’re earning zero interest. But the same holds true for savings accounts at these big brick and mortar banks. You go and you look online at the rates that are getting offered at the big brick and mortar banks, they are pathetically low. We’re talking about 0.1%, 0.2% at these big brick and mortar banks. You can earn so much more between four and 5% by moving some of that cash into a savings account that’s online, one of these online banks, or into a money market mutual fund.

If you’re determined to hold cash, and I’m not sure it’s a great time to be holding a lot of cash, but if you’re super conservative and you’re holding a lot of cash, for goodness’ sake, don’t hold it at your local bank. Put it into an online savings account, put it into the money market fund at your brokerage firm because you will at least earn a significantly higher yield. And potentially it’ll start to make you think that maybe these are investment dollars and perhaps they should be invested more aggressively. That’s it for this month. Happy New Year to you. Happy New Year to all our listeners, this is Jonathan Clements, Director of Financial Education for Creative Planning. You’ve been listening to me and Peter Mallouk and we are Down the Middle.

Disclosure: This show is designed to be informational in nature and does not constitute investment advice. Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment or investment strategy, including those discussed on this show, will be profitable or equal any historical performance levels.

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