By Tim Courtney, Chief Investment Officer
2023 was a year of dynamic shifts in the financial markets, characterized by interest rate hikes and pauses, inflation concerns and relief and significant market concentration in mega-cap stocks. As we look ahead to the first quarter of 2024, let's delve into these three pivotal areas and unpack what they mean for investors moving forward.
1. Interest rates. The market is salivating for interest rate cuts. Late last year, the stock and bond markets were betting that the Federal Reserve (Fed) would soon reverse course and start cutting. However, the market’s track record of predicting the Fed's moves and the course of inflation has been less than stellar over the last three years. Many investors are eager for a rate reduction because they grew accustomed to low rates during the pandemic. Given Fed Chair Jerome Powell’s dovish tone in December,1 lower interest rates seem closer than ever. And while the government and some investors will cheer if rates fall, it will ultimately be the wrong move for most citizens if inflation remains elevated.2
2. Inflation. Our initial forecast for 2023 was that inflation would decrease but stay above target, and that is roughly where we find ourselves today. Inflation eased last year with the most recent Consumer Price Index (CPI) reading at 3.1%.2 While there are factors working to pull prices lower, there are other forces countering them. For instance, people have been working less but demanding increased compensation.3 Unless productivity improves, this leads to lower production with increased demand, which is inflationary.4
Inflation in 2023 was more service-oriented, and the evolving role of AI in addressing productivity gaps has been a significant theme that the market has been very optimistic about.5 We’ll be closely watching how inflation and productivity play out in the early months of this year, and generally AI’s role moving forward.
3. Market concentration. Last year, the market's growth was predominantly driven by mega-cap companies, leading to record levels of market concentration. Just seven stocks (Apple, Alphabet, Microsoft, Meta, Amazon, Tesla and Nvidia), referred to as “The Magnificent Seven”, made up 29% of the S&P 500’s market cap.6 These companies and others have garnered significant investor attention, but it’s important to recognize the headwinds facing these names.
First, these stocks have become more expensive, some of them very expensive.7 Their hefty price tags can make future expected returns more challenging as the market and competition evolve. In addition, heightened regulatory scrutiny has become a clear risk. Until now regulation has benefited the mega caps as (1) they are generally in sectors with lower regulatory burdens than say energy/utilities, healthcare or finance, (2) their influence can tilt regulations to their benefit and (3) their size has provided capacity – their competitors often lack – to deal with the cost and complexity of regulation. Now, however, there is a growing push for antitrust measures and political pressure to reign in the mega-caps.8
As we move into 2024, we’ll be watching these themes with careful optimism and necessary discipline. If you have any questions, feel free to reach out to your Exencial advisor.
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The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities. There is over USD 9.9 trillion indexed or benchmarked to the index, with indexed assets comprising approximately USD 3.4 trillion of this total. The index includes 500 leading companies and covers approximately 80% of available market capitalization.