Stocks capped off a strong 2023 with solid gains in December amid increasing investor confidence in a soft landing, supported by falling inflation and a clear pivot by the Federal Reserve (Fed). The S&P 500 Index gained 4.4% for the month after a nearly 9% gain in November, to bring the index’s 2023 return to 26.3% including dividends. The U.S. 10-year Treasury yield plummeted 45 basis points (0.45%) to end the year about where it started near 3.9%, helping to support risk asset prices in December.
Moreover, the expectation of rate cuts in 2024 supported fixed income assets with returns for the Bloomberg Aggregate Bond Index generating the best two-months of returns since 1982. The impressive November and December returns helped the index generate positive calendar year returns (+5.53%) for the first time since 2020. All the core sectors generated positive returns for the year.
As 2024 begins, LPL Research’s Strategic and Tactical Asset Allocation Committee (STAAC) continues to see the risk-reward trade-off between equities and fixed income as roughly balanced, with the stronger equity market gains being supported by lower Treasury yields and prospects for a less restrictive Fed.
INVESTMENT TAKEAWAYS:
- The STAAC maintains its recommended neutral equities allocation based on the Committee’s assessment that the risk-reward trade-off between equities and fixed income is roughly balanced. Lower yields are supportive of elevated equity valuations.
- The Committee favors large cap stocks over their smaller brethren ahead of a likely economic slowdown over the next several months.
- If the downward trajectory in inflation remains intact and interest rates stabilize or fall further, growth style stocks may outperform.
- The STAAC favors U.S. equities over developed international due to a relatively stronger domestic economic growth outlook and superior earnings power, though the Committee still finds Japanese equities attractive.
- The bond market likely front-ran Fed rate cuts for 2024 with markets expecting at least six 0.25% cuts during the year. As such, the recent fall in yields is probably overdone. Additionally, Treasury supply is expected to increase in the coming quarters, which will likely keep upward pressure on yields. As such, our year-end 2024 target for the 10-year Treasury yield is 3.75% to 4.25%.
- The selloff in the banking sector provided an attractive opportunity in preferred securities; however, the risk-reward for core bond sectors (U.S. Treasury, Agency mortgage-backed securities (MBS), investment-grade corporates) is more attractive than plus sectors, in our view.
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IMPORTANT DISCLOSURES:
This material has been prepared for informational purposes only, and is not intended as specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors and they do not take into account the particular needs, investment objectives, tax and financial condition of any specific person. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing. Any economic forecasts set forth may not develop as predicted and are subject to change.
Stock investing involves risk including loss of principal. Because of their narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies. Value investments can perform differently from the market as a whole and can remain undervalued by the market for long periods of time. The prices of small and mid-cap stocks are generally more volatile than large cap stocks. Bonds are subject to market and interest rate risk if sold prior to maturity.
Bond values will decline as interest rates rise and bonds are subject to availability and change in price. Corporate bonds are considered higher risk than government bonds.
Municipal bonds are subject to availability and change in price. Interest income may be subject to the alternative minimum tax. Municipal bonds are federally tax-free but other state and local taxes may apply. If sold prior to maturity, capital gains tax could apply. U.S. Treasuries may be considered “safe haven” investments but do carry some degree of risk including interest rate, credit, and market risk. Bond yields are subject to change. Certain call or special redemption features may exist which could impact yield. Mortgagebacked securities are subject to credit, default, prepayment, extension, market and interest rate risk.
Credit Quality is one of the principal criteria for judging the investment quality of a bond or bond mutual fund. Credit ratings are published rankings based on detailed financial analyses by a credit bureau specifically as it relates to the bond issue’s ability to meet debt obligations. The highest rating is AAA, and the lowest is D. Securities with credit ratings of BBB and above are considered investment grade. Duration is a measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. It is expressed as a number of years.
Alternative investments may not be suitable for all investors and should be considered as an investment for the risk capital portion of the investor’s portfolio. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.
Event driven strategies, such as merger arbitrage, consist of buying shares of the target company in a proposed merger and fully or partially hedging the exposure to the acquirer by shorting the stock of the acquiring company or other means. This strategy involves significant risk as events may not occur as planned and disruptions to a planned merger may result in significant loss to a hedged position.
Commodity-linked investments may be more volatile and less liquid than the underlying instruments or measures, and their value may be affected by the performance of the overall commodities baskets as well as weather, geopolitical events, and regulatory developments. The fast price swings in commodities and currencies will result in significant volatility in an investor’s holdings.
Investing in foreign and emerging markets securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
Earnings per share (EPS) is the portion of a company’s profit allocated to each outstanding share of common stock. EPS serves as an indicator of a company’s profitability.
Earnings per share is generally considered to be the single most important variable in determining a share’s price. It is also a major component used to calculate the price-toearnings valuation ratio. Gross Domestic Product (GDP) is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory.
All index data from FactSet.
For a list of descriptions of the indexes referenced in this publication, please visit our website at lplresearch.com/definitions.
Managed futures are speculative, use significant leverage, may carry substantial charges, and should only be considered suitable for the risk capital portion of an investor’s portfolio.