Should investors have reason to be optimistic about the overall economy and financial markets now that we're looking full steam ahead to 2024? We think the answer is yes, but there are some important caveats. there is.
Based on recent economic data, I believe the worst of inflation is long gone, both here in the United States and globally. Financial markets are now speculating when the Fed will begin its expected three quarter-point rate cuts this year (at least). Does that mean we will return to the ultra-low rate environment we enjoyed for a long time before 2020? i don't think so. Moderate inflation will continue for the time being.
why? Because there are certain structural forces at work in our economy that keep prices rising. For example, “Green Premium”. This means that the major players in our economy (governments, large corporations, consumers, etc.) are pushing hard towards environmental sustainability and are seeking innovative products and solutions to get there. I am. However, the production of these solutions has not yet been able to keep up with the growing demand.
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As I recall from my first-year college economics class, this imbalance between supply and demand will result in energy prices remaining high. In my view, this will bring U.S. inflation levels somewhere between 2% and 3% by mid-2024, if not sooner.
That said, we are optimistic for the remainder of 2024, subject to some key conditions. One is my prediction that the overall US economy will slow to about 1.5% GDP growth in the first half of this year, then accelerate in the second half of 2024.
We believe that hard landings and recessions are avoidable. Looking ahead to 2024, he said, companies will increase capital investment and consumers will become more confident. It is also worth noting that the economy and financial markets tend to react positively once they overcome the uncertainty of who will win at the voting booth, so the economy should recover by the end of the year following the general election. It is important.
Market Movement: Covered Calls and Focused Sectors
For many equity investors, this is an opportunity to add U.S. stocks to their portfolios and further the process of “re-risking.” However, timing will be key.
As the economy slows in the first half of 2024, markets may move sideways rather than upwards, and some volatility in equities may be expected. It is important to consider that as the equity risk premium compresses, income becomes a larger proportion of total returns. For example, look for strong and reliable dividends among value stocks.
Another way to increase your portfolio's income is to sell covered calls when stock market volatility is high. With a covered call, the seller of stock gives the buyer the option to buy the stock at a specific price within a specific time period. The buyer pays a cash fee for the right to purchase the stock, which generates income for the seller. This can be a smart strategy for sellers who don't expect the stock to appreciate significantly, especially during times of market volatility.
Stock markets are also pricing in the impact of an economic slowdown in the first half of 2024, creating a potential buying opportunity. In this vein, I am optimistic about certain sectors of large public companies. One is financial institutions (more on this later) and the other is the defense subsector of industry (full transparency: I work for a large financial institution). You can also add to this list subsectors of healthcare that are driven by demographic trends (such as an aging population), such as pharmaceuticals and medical technology.
Big tech stocks benefit from AI
Last but certainly not least is big technology. Despite their very high valuations, I believe that some of these companies will continue to be global leaders as AI adoption expands.
On the other hand, my company recently moved to overweight small-cap stocks, but keep in mind that it may take a little patience. As economies enter their next growth cycle, performance tends to improve. With that in mind, small and medium-sized regional banks make up about 20% of the Russell 2000 Small Cap Index, and many of these banks are poised for a recovery as borrowing costs fall and deposit pressures are alleviated to some extent. I believe that it is. I also believe that most local banks will be safe from loan losses as the economy takes a soft landing.
final thoughts
No one can predict exactly where the economy will go as 2024 progresses, but the key indicators I'm watching suggest that economic growth will be slow in the short term. It seems. However, we are hopeful that a hard landing and recession can be avoided. In this scenario, prudent investors should consider adding risk assets to their portfolios ahead of the recovery that I expect to occur later this year and beyond.
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This article is for educational purposes only and is not an offer or solicitation to sell any financial product or service. This article is not intended to provide financial, tax, legal, accounting, or other professional advice. There is no guarantee that any investment strategy will be successful.
Opinions, estimates and forecasts constitute Wilmington Trust's judgment and are subject to change without notice. Investing involves risk and may result in gains or losses.
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