Turning OUTLOOK 2023 to 2024 text on wooden cube blocks.

2024 Market Outlook

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“Trying to predict the direction of the market over one year, or even two years is impossible.”

It is January and the time of the year that a myriad of practitioners put out their forecasts for the market and the key indicators that drive the overall economy. Despite the unenviable record of market predictions, investment practitioners keep doing it, particularly when industry peers take the lead and put out the first forecasts. As our clients are aware, we at Trajan Wealth are not in the business of predicting the markets; our process, by contrast, involves looking at what is being “priced in” given the level of asset prices – call this a “risk premium,” and the risks to the implied returns given our understanding of the underlying assets. Thus, our outlook should not be interpreted as the rate of return we predict to earn for the next year or two – rather an estimate of the risk premium we expect to earn if the assets are held over the course of a market cycle. Given that there is risk to our “median” estimate, we highlight a range of returns over asset classes that should capture the bulk of probable future outcomes. While the “median” estimate is quantitative and scientific, we take the liberty of a certain amount of judgment – or “art” when postulating the range of outcomes.

Public Equities

With valuations in the US equity markets higher than long-term averages, “risk premiums” or expected returns are low by historical standards – see column marked “Earnings Yield” in the table below. The US Treasury market is pricing inflation to average 2.3% over the next decade, slightly higher than the US Federal Reserve Bank’s 2% target. As such, we expect base case nominal returns to range from 4.8% in the tech-heavy NASDAQ to 9.0% in international equities over the next cycle, with the S&P 500 in the middle at 6.7%. We understand that our “base case” estimate is subject to forecasting error – thus, using an error rate of 25%, our cyclical estimate for nominal returns ranges from 5.0% to 8.4% in the S&P 500 to about 6.8% to 11.3% in international equities – see column marked “Return Range.”

Index 2023 Returns PE Ratio Earnings Yield B/E Inflation Exp. Return (Full Cycle) Return Range (25% error rate)
US Large Cap - S&P 500 26.3% 23.0x 4.4% 2.3% 6.7% 5.0% to 8.4%
US Large Cap – Tech Heavy NASDAQ 44.1% 39.4x 2.5% 2.3% 4.8% 3.6% to 6.0%
International Equity – MSACWI ex US 16.2% 15.0x 6.7% 2.3% 9.0% 6.8% to 11.3%
US Small/Mid Cap – Russell 2500 17.4% 23.4x 4.3% 2.3% 6.6% 5.0% to 8.3%

2023 returns and PE ratio source: Bloomberg, January 12th, 2024

Fixed Income

The Federal Reserve increased the Fed Funds rate to the highest level since 2001 to combat inflationary pressures. Interest rates across the curve followed suit and have moved higher in near lock-step. The market now expects the Fed to cut rates 3 to 5 times in 2024. Fed cuts generally lead to declining rates across the yield curve. As a result, the present time is an optimal entry point for fixed-income investors to “lock in” current yields.
Index 2023 Returns Duration Yield Avg. Credit Quality Exp. Return (Full Cycle) Return Range +/- 50bps rate change
Fed Funds Rate 5.03% O/N 5.3% Benchmark 5.3% 4.8% to 5.8%
10 Yr US Treasury 3.3% 7.2 3.9% Benchmark 3.9% .6% to 7.3%
US Aggregate Bond Index 5.5% 6.2 4.5% AA2/AA3 4.5% 1.4% to 7.6%
US IG Corporate Index 8.5% 7.1 5.1% A3/BAA1 5.1% 1.6% to 8.6%
US HY Corporate Index 13.4% 3.2 7.6% B1/B2 7.6% 6.0% to 9.2%

2023 returns and duration source: Bloomberg, January 12th, 2024

Economy

The Federal Reserve operates under a dual mandate to promote stable prices (i.e., inflation) and conditions for economic growth. The Fed has defined low and stable inflation as a year-over-year change of 2%. In March ‘22, the Fed began raising rates to bring post-COVID-19 pandemic inflation back to its 2% target. The speed and magnitude of the rate hikes rendered this one of the most aggressive tightening cycles in almost four decades. Higher interest rates will slow the economy, but it remains to be seen to what extent. The Fed is aiming for a “soft landing,” meaning that inflation is brought under control while unemployment remains relatively low, and the economy is experiencing growth.
Index Q4 ’23 Q1 ’24 Q2 ’24 Q3 ’24 Q4 ’24 Q1 ’25
Core PCE (Inflation) 3.4% 2.8% 2.5% 2.5% 2.4% 2.3%
GDP 2.6% 2.2% 1.7% .7% .9% 1.1%
Unemployment 3.7% 4.0% 4.2% 4.3% 4.3% 4.3%
Fed Funds Rate 5.5% 5.5% 5.25% 5.0% 4.75% 4.25%
2 Yr Treasury 4.3% 4.4% 4.1% 3.9% 3.8% 3.5%
10 Yr Treasury 3.9% 4.1% 3.9% 3.8% 3.8% 3.7%

Summary Chart

2024 Outlook Chart
All projected returns are displayed as annualized averages
Udayan Mitra, CFA

Udayan Mitra, CFA

Udayan is Trajan Wealth's CIO with over two decades of experience in the investment management industry. He earned a Bachelor of Science degree in Economics from the London School of Economics and an MBA in Finance from Rice University.

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