The NEI team shares their market outlook for 2024, with a focus on managing valleys in order to get to the next peak.
It’s been a tough few years for investors. Sure, the U.S. stock market has been on a tear in 2023, but it felt like only a select few stocks have participated in this rally. The rest of the markets were mired in the sluggishness resulting from one of the most aggressive central bank rate tightening cycles in recent memory. The good news is that it looks like we have witnessed a few peaks this year, like peak central bank rates and peak inflation. So, the biggest question for investors in 2024 is what happens after these peaks? Peaks are often followed by valleys.
Accelerating peaks and valleys have been a dominate theme of the pandemic and post-pandemic era. Equities markets have been difficult to navigate with two bear markets and two bear recoveries in just the past three years, bonds recently experienced the worst year in over two centuries, and three of the last four years have been defined by bearish investor sentiment. It’s no surprise that we’ve seen record flows into money market funds as investors look to secure a guaranteed return in the face of so much uncertainty, but keeping cash on the sideline isn’t a viable long-term investing strategy.
I find this quote from author Spencer Johnson is helpful in these sort of market environments: “Between peaks there are always valleys. How you manage your valley determines how soon you reach your next peak”. Looking for opportunities in peaks and valleys is about looking for lower correlations, lower risk, and lower volatility asset classes. Using that lens we see lots of opportunities ahead.
The end of the unprecedented monetary tightening cycle is very near—if it isn’t here already—and that provides a great entry point for fixed income investors and those with balanced portfolios. Real yields are starting to make the income side of the equation for bonds very attractive, plus expectations for rate cuts later in 2024 will likely add capital appreciation in the years ahead. Within our own strategic asset allocation, we are favouring High Yield segment of the market as over the next 10-year period it shows some of the highest return potential of any asset class. On a risk-return basis the Fixed Income universe is full of opportunity for patient investors who are willing to take a bumpy ride, and we are adding to our fixed income holdings in our own tactical asset allocation pool as well.
On the equities side we are cautious about the impact of slowing global growth on corporate earnings, plus the risks posed by increased geopolitical tensions. However, we prefer being selective about high quality companies that offer stability and growing dividends, especially in some regions and sectors where valuations are cheap on a relative basis. While 2023 was a difficult year in the renewables and clean infrastructure space, we don’t think those long-term themes have gone away. The march towards a lower carbon world is still a huge opportunity and at current low valuations we believe this long-term secular tailwind will generate alpha.
We don’t try to time the markets, but I do believe how we manage the valley is how we will get to our next peak. A disciplined active approach is a key component to success and our sub-advisors’ investment philosophies and processes that tilt towards quality while focusing on defensive characteristics are well suited to outperform in this type of market that requires a more thoughtful and selective approach to constructing portfolios.
I hope collection of views from a select group of our 19 sub-advisors helps you make informed decisions going into the new year.