How the election will hit markets and 4 other wealth predictions for 2024

December 27, 2023 2:51 PM

From the prospects for a soft landing in 2024 to what the presidential election will mean for markets, the coming year presents plenty of fertile ground for predictions.

And, as usual, wealth managers aren't shy about stepping forward and offering a little insight into what they see for the next 12 months. Although industry prognosticators typically show a good deal of diversity in their opinions, they did land on some common themes when trying to forecast what 2024 holds for investors.

Namely, most seem to see the prospects of a prolonged recession receding as the Federal Reserve signals rate cuts amid still strong economic data. That should mean another strong year for stock and bond markets and handsome returns for those who have the discipline to diversify their portfolios and stay the course during short-term volatility.

For more on what wealth managers see as they look into 2024, scroll down.

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A soft or bumpy landing?

Wealth managers and other experts are largely in agreement that policymakers have avoided the sort of debilitating and far-reaching recession that some economy watchers had dreaded coming into 2023. Now the question turns to: If the U.S. is indeed in for a soft landing, how soft will it be?

Kristina Hooper, the chief global market strategist at Invesco, said she prefers to talk of a "bumpy" landing. No, she said, it's not going to be a repeat of the housing collapse of 2008 or other major recessions. But Hooper thinks the notion of a "soft landing" undersells the instability that could be seen in markets, particularly in the first half of the year.

Small companies that rely on borrowing suffered as debt became more expensive during the Fed's interest rate hikes in 2023. Hooper said she expects the effects to start showing up in the balance sheets of small cap firms in the first half of next year.

Still, she said, the U.S. economy has plenty of cushion built in. She noted that the unemployment rate — last clocked at 3.7% — could go up a full percentage point and still be below the historical average.

"Hence the best descriptor I have is 'bumpy landing,'" Hooper said. "And I think it's going to be brief. I think this is going to be like a first-half slowdown, not a broad-based recession. And then there will be a reacceleration in the back half of the year."

Solita Marcelli, the chief investment officer for the Americas at UBS Global, sees things much the same way. Speaking to Financial Planning's sister publication American Banker in an online interview on Dec. 12, Marcelli said the cumulative effect of the Fed's rate hikes have yet to be fully felt in the economy.

"Now, that said, our view is not for a recession," Marcelli said. "I don't think a recession, the way we understand it, is in the cards because I think there are important shock absorbers that are in place. And the most important of those is the labor market."

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Interest rates

The Federal Reserve embarked in 2022 and 2023 on its most aggressive campaign to combat inflation in recent memory, hiking rates from near zero to about 5.25% over the course of a year and a half. Almost no one now expects them to remain that elevated.

Marcelli said UBS's projection is for rates to come down by 0.75% in 2024 as inflation continues to taper off.

"I think we're going to see prices moving closer to the Fed's target," she said. "And with that backdrop, that should give some ammunition for rate cuts."

Some see room for even bigger drops. Speaking on Dec. 14 at an outlook roundtable for 2024, Chris Hyzy, the chief investment officer for Bank of America's Merrill Lynch and Bank of America Private Bank, said market watchers expect as many as seven rate reductions in the coming year.

His colleague Marci McGregor, the head of portfolio strategy at Bank of America Merrill Lynch, noted during the roundtable that interest rate cuts have historically given ballast to stock markets.

"So I think you'll have this choppy market," McGregor said. "But overall, it will be an uptrend."

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Time to diversify

This year was remarkable not only for how markets outperformed many analysts' expectations — the S&P 500 was up more than 25% this year on Monday — but also for the fact that so much of the rise can be attributed to just a handful of companies, seven to be exact.

The so-called Magnificent Seven — Nvidia, Alphabet (Google), Microsoft, Apple, Meta (Facebook), Amazon and Tesla — accounted for nearly 30% of the total S&P's value in late September and had been the driver for nearly 65% of the market's gains, according to the investment firm BlackRock. Opinions are now greatly divided on whether these firms are overvalued or have room for yet more growth in 2024.

Meanwhile, a consensus is developing that the gains are likely to rest on a much broader base in the coming months. That adds fuel to arguments against concentrating investments in a small group of assets.

McGregor said that, even in a year like 2023 when the biggest gains came from only a few stocks, it's hard to make a sound argument against portfolio diversification. In any given year, she said, the chance that the S&P 500 will fall in value is 26%. That turns into a 6% chance of losses for investors who keep their money in the market for a decade, she said.

"So we really try to stress to our clients that trying to time the market is truly a fool's errand," McGregor said. "It's about being invested for the long term, especially for the growth and innovation that's happening in our economy."

Looking beyond stocks, Marcelli said she and her colleagues at UBS now view bonds much more favorably than they have in years past. Since bond prices move inversely to yields, falling interest rates seem poised to push up the value of fixed-income investments.

Marcelli said next year could be almost the mirror image of 2022, when rising interest rates sent the stock and bond markets reeling.

"I think 2024 will be sort of the opposite of that, at least the first half of the year, where it'll be a supportive environment for both," she said.

Looking beyond the norm

When wealth managers talk about diversifying, they're also apt these days to look beyond U.S. stock and bond markets. Hooper said too few investors are putting their money to work overseas, particularly in emerging markets like Thailand and Indonesia.

Many of these countries were quick to move when it came time to battle inflation and now have their "houses in order," she said. Hooper said she also favors investments in small companies, which tend to be undervalued and which should start to benefit from easing lending later in 2024 as rates fall.

"What I would say is this is an opportunity to take profits in U.S. equities, take profits in some of the large cap equities and reallocate," Hooper said. "And one can simply do that by rebalancing, because gains have been made. And so I think this is just a natural opportunity to increase exposure to emerging markets and to increase exposure to small caps."

Hooper noted that many investors also held sizable portions of their portfolios in cash in 2023. The strong returns offered on both money market funds and high-yield savings accounts presented a compelling case for doing so. But with rates poised to come down in 2024, now is probably the time to start looking for other ways to put those assets to work.

Mike Laske, a wealth management advisor at Kalamazoo, Michigan-based Greenleaf Trust, agreed about opportunities in international markets. He also said he's increasingly pointing investors toward opportunities in "preferred shares," which typically pay higher dividends than the common stock issued by public companies.

"Preferred shares do tend to kind of straddle that line for us between alternatives and equities," Laske siad. "It's been a nice way, tactically, just to shift a little piece of the equity positions that we recommend towards preferreds."

Election correction?

Perhaps the biggest question is what effect the coming presidential election will have on markets next year. Of course, no two contests for the highest office in the land are the same.

Still, wealth managers generally agree that elections tend to bring on a period of volatility followed by sustained growth. Again, the advice is the same: Look toward the long term.

Hooper said her biggest fear is that investors will get spooked as the presidential contest nears.

"Obviously, this is an unusual election year," she said. "But, at the end of the day, there have been unusual election years in the past. And over time, the stock market has this gravitational pull upward."

Marcelli said she thinks the U.S. will end up with a divided federal government, with Republicans controlling the Senate and Democrats the House. That makes the chances slim for the adoption of any sweeping policy change with the potential to affect markets.

But even without divided government and gridlock, she said, UBS's research suggests politics generally have little influence on investment returns.

"Usually it's the fundamentals that drive the market. It's the Fed, it's the economy, it's all of that stuff," Marcelli said. "So from that perspective, our advice has always been to our clients, our advisors, if you want to express a political view, do it through a vote rather than your portfolio."