#39 | 2024 Election Year Market Outlook

Jon “Jag” Gay: Welcome to Protecting and Preserving Wealth. I am Jon “JAG” Gay, joined by Bruce Hosler and Alex Koury of Hosler Wealth Management. Bruce, Alex, good to be with you both.

Bruce Hosler: Good morning, Jon. Good to be with you.

Alex Koury: Thanks, Jon. Good to s– hear you again.

Jon: Hear you, see you. You know it’s a podcast, so we make it work. In a recent episode, we talked about the Magnificent Seven stocks in the stock market and the S&P 500’s performance over 2023. As we are into 2024 now, you’re back to talk with listeners about the market outlook for 2024. Also, we’re heading into an election year, and that always seems to put investors on edge. Let’s start at the top. What should investors know about election years, Alex? Does it matter if we elect a Democrat or a Republican in the fall?

Alex: The short of it is really, it doesn’t necessarily matter who gets elected into office, whether it’s a Democrat or Republican. There’s a lot of debate about that, of course, over the last few years, especially has been quite a divide in our political views. When we look across the election cycle between January of 1926 and this year as well, during presidential election years, the average annual return is actually 11.6% regardless of the party. The fourth year of the election cycle tends to be the second strongest year behind the third year of the cycle, which happens to be in 2023.

Jon: It’s a loaded question here. Does that mean investors should assume that 2024 is going to be a smooth ride all the way to the elections in November?

Bruce: Oh, absolutely not.

Jon: I thought you might say that.

Bruce: We’ve had the Magnificent Seven run up so high. With the AI going on like it is, it’s going to change our world dramatically.

Jon: Oh, yes.

Bruce: They could continue to go higher or they could experience a little bit of a correction, 20, 30%. We don’t know what that holds, and nobody does. What’s really interesting is we have experts, analysts, talking heads, and people with whom we have a lot of respect that fall on both sides of the spectrum of what could potentially happen to the markets and investments in 2024. It doesn’t necessarily mean it’s going to be a smooth ride, but it could be. We need to be prepared in case it’s volatile, which we could experience and we did experience in 2023.

Jon: For sure. We talked about the S&P 500. It was up 24% in 2023. I’m not going to ask you for a number, Alex, but could investors anticipate a bump in 2024 similarly?

Alex: Yes, that’s the hope out there. Now, if we go back to what we talked about last time, though, the Magnificent Seven stocks made up the majority of the returns of the S&P 500 in 2023. And other stocks were pretty much flat. What we need to see in 2024 is a broadening out of the returns of the total S&P 500 if we may see a run like that.

Now, there’s no guarantees out there, of course, of what is going to happen, what could happen. Of course, over the last few years, since 2020 during COVID, we’ve seen very large swings in the stock market pretty much every year. As I mentioned, we need to see a broadening of the returns across the spectrum of getting everyone to participate in a rally if that’s going to be the case, because we can’t just assume the Magnificent Seven stocks are going to have 100%, 200% returns in this next year as well. On top of that, we’ll talk about this here in a moment, but there are a lot of risks that still exist in the market, and we cannot ignore those.

Jon: Essentially, you’re putting all the 500 eggs in 7 baskets, if I could stretch that analogy a little bit. It makes sense you would need to be looking more broadly. Bruce, everyone’s heard of those Magnificent Seven stocks, and if you haven’t, go back and listen to our previous episode about it and how well they performed in 2023. What other assets are you keeping your eye on here in 2024?

Bruce: Certainly with the Fed lowering the interest rate, and let me restate that, the Fed didn’t lower interest rates, they just paused on the increase of the interest rates. The 10-year treasury has dropped dramatically, and that’s going to follow through and make money that was being more expensive, less expensive for companies to borrow and use for growth. That gives us some hope that some of these companies that may have been struggling with higher interest rates will not have to struggle as much as we had feared if the interest rates had continued to go higher.

Some of the places that we may look, small caps have been out of favor for a number of years, they have started to make a little bit of a move. You want to be very selective in the areas that we do that. The Magnificent Seven now are 35% of the S&P 500, even though there’s 500 stocks, they’re cap-weighted. Based on the capital that they have of the S&P 500, that index is weighted on there, so they’re going to have a big input there. Many of them are trading at 50 or 60 times earnings. They could have a correction or they could continue to go higher based on the AI role that we’re seeing taking place. You cannot avoid that; you have to have exposure there.

Probably most importantly, people long-term want to participate in the equity markets, they want to be diversified, it is definitely a stock picker’s market. Let me give you a couple of examples. I think Microsoft is going to continue to do well, it’s one of the big seven, but Costco is not one of the big seven, but I shop there all the time, and when I go there, there’s tons of crowds of people. I think they’re going to continue to have a good business.

There are opportunities in the market that are not part of the Magnificent Seven that are going to continue to do well, and you just have to make sure you have a diversification for that equity. That if you need income, that you’re not using that from the stock market because it could be volatile. That needs to be your long-term money. Your short-term money that you’re taking income from needs to be more safely invested in, say, perhaps like a fixed-income portfolio, something like that.

Jon: Of all topics we’ve hit on in previous episodes of the podcast, knowing that you got to have those different buckets segmented for different areas of your retirement, I know you do that with your clients, Bruce. Alex, we saw a pretty good rally toward the end of 2023, also known as a Santa Claus rally. It caught everyone’s attention. Some investors are wondering if now is a good time to invest. What are some of the other potential headwinds or hazards investors should think about? What are some potential tailwinds that might provide for a more favorable outlook?

Alex: Some of the headwinds that are really in front of us that we would still want to pay attention to is the Federal Reserve still controls the direction of the economy. Even though they’ve given us the signal that they’re going to begin cutting rates in 2024, the market’s got a little bit ahead of itself right now of anticipating more interest rate cuts, but rates may not fall fast enough. The Federal Reserve may need to maintain their higher-for-longer stance to avoid what we’ve seen in 2022, which was massive inflation run-ups and higher interest rates to try and tamp that down.

If you think about it, if the Fed drops rates too quickly, that may because another spike in inflation. We don’t want to see that. Inflation could stay higher for longer. We still have a war in the Middle East. We have a continued war in Ukraine. Just name a few of those headwinds. Of course, we have the Presidential election in 2024, which even though it may statistically be a positive year for the stock market, doesn’t mean it’s going to be a smooth ride either.

Here’s some tailwinds, I think, are very interesting to pay attention to. The number one is this. There’s over $6 trillion of money that’s been piled into money market funds over the last couple of years. That makes a lot of sense because why would someone take stock market risk when you can get 5% or more returns on your cash by sitting in a very safe position? Now that rates are starting to come down, eventually, as the Federal Reserve begins to drop their interest rates on the federal funds rate, those returns are going to go away on the money market funds. What that says is $6 trillion has to find a home again, whether it’s going to be in the stock market, the bond market, or real estate market.

Another headwind that’s very interesting is that in 2023, there’s been almost $100 billion in equity outflows from mutual funds. Every time this has happened, we go back to 2007, 2011, 2016, and 2019, and in 2020, the year following a year where you’ve had massive equity outflows from funds, the following year of the market has returned anywhere between 18% and 28.7%. That’s not a guarantee that’s going to happen again, of course. If history is on our side, we want to make sure that our money is invested, diversified, tailored to our risk level to not miss a potential run like that.

Again, we’re in the fourth year of the election cycle, like we talked about earlier, that tends to be the second strongest of the four-year cycle. We just want to pay attention to, again, the tailwinds, but also don’t ignore the headwinds. We’ve seen many slips of the rug, if you will, between COVID, a war in Ukraine that caused the market to crash in those couple of years as well. Be safe is the answer.

Jon: Bruce, let’s zoom out, and Alex is tiptoeing into this, but let’s go to the economy as a whole for a moment. A lot of analysts predicted a recession in 2023. Didn’t happen. The economy continues to grow. Consumers are still spending. We have record-low unemployment still. What should we be paying attention to overall for the economy in 2024?

Bruce: Wow. There’s some really big topics that we talk about in the office all the time. One of them is the shortage of housing in our country. I’ve heard that it’s as many as 6 million units. Here, we have the interest rates that are high, and you would think that the price of houses would come down because it’s so expensive to try and buy a new house. The problem is there’s such a shortage that even though interest rates are high, houses have maintained their value, and we believe, going forward, that they’re going to continue to do that.

I have some friends that are going to build a new house. They talk to the contractor, and the contractors are telling them, “Oh, yes, it’s going to be two years.” Supply chain shortages, shortages of labor, being able to get things through the permitting process. We are not going to be able to build enough housing, and housing is foundational to a lot of things in the economy.

Certainly, our economy is a consumer spending economy, and so the consumer, we’re concerned and watching the consumer right now, they have run up their credit cards, some of them are starting to be stressed a little bit on that, but they’ve been spending up to now. Just go to an airport and try and fly somewhere, all the planes are full, there’s still people that are feeling like they want to spend. We don’t want to prognosticate that we necessarily fall into a recession, but it could be a slight recession or things like that. We don’t see anything that is going to cause a severe recession minus a world event, geopolitical or something like that.

We think there’s an opportunity to do that, but we’re concerned about the consumer, we’re watching the consumer, and so you got to go pay attention to the consumer and how they’re doing with that. We have low unemployment and there’s more people that appears that are coming back into the workforce again. All of those lend to the potential to kinda have a soft landing, that’s what people have been talking about. We think that’s possible, and we think even some sort of a recession, we don’t think it’s necessarily a big recession, but we’re watching the consumer, that’s generally how our economy is driven.

Jon: Really good information from both of you today. I’ll ask this to either or both of you, what are your biggest takeaways for our listeners from today’s podcast?

Alex: My biggest takeaway is if you’ve been sitting on the sidelines, if you haven’t invested extra cash yet or you’re just not really sure where to get started, take a step back and take a breather and really assess where you are today with your investing plan, your retirement plans. As Bruce mentioned earlier, how much money do you need in the next, say, 12 to 24 months of cash or very safer money, as opposed to what you can afford to invest in the stock market. It’s a long-term game.

One year doesn’t make the returns for you forever, but you want to also be paying attention to your level of risk and diversification as well. Don’t get caught up in the hype right now. There are opportunities out there, as we talked about, there’s only seven stocks that have really performed very well over the last 12 months. That doesn’t mean they’re going to continue to perform well, there may be other winners out there you want to take a look at.

Bruce: I agree, the diversification is important, and really, look at your financial plan. If you have your income for the next five years invested in safer, fixed-income portfolios, you can afford to have a holding period of 10 years before you need any of your stock market investments. Even if the market has a correction and it runs up, but we hit the average, like Alex said, in election year of 11% or more, most people would be happy with that, but you cannot get that if you’re sitting on the sidelines.

You have to be in the game and participating, but not taking risk with money that you need for income. When we create a financial plan, that’s the answer that I would say is make sure you’re following your financial plan and your risk tolerance for when you’re going to need income and let your other money run. Who would have thought this year that the market would have traded up just like it did? Everybody was prognosticating a recession this year. Did not happen, market traded up, and for those people that were sitting on the sidelines, they’re kicking themselves right now.

Jon: Such a huge opportunity cost. We’ve talked about this in previous episodes. If you were out of the market on the biggest bounce-back days, it would cost you dearly as you look back over the last few decades. Anything else you guys want to cover today before we wrap it up?

Bruce: Just that we’re at a new year and a new opportunity, folks. We look forward to the opportunity to have a conversation with you if you have questions on these topics. We have investments that have the ability to diversify your portfolio and let you participate in the game, so you definitely want to have a conversation with your planner or with us to talk about the opportunities that are out there for you.

Jon: Bruce, how do our listeners best find you and your team at Hosler Wealth Management?

Bruce: They can reach us on the website at hostler, H-O-S-L-E-R-W-M.com, hoslerwm.com. They can reach us here in Scottsdale, 480-994-7342, or in Prescott, 928-778-7666.

Jon: Great information, as always. Thank you both, and I look forward to a great 2024.

Bruce: Look forward to it, Jon.

Alex: Good to talk to you again, Jon. We’ll talk to you next time.

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Jon: Securities and advisory services offered through Commonwealth Financial Network®, member of FINRA/SIPC, a registered investment advisor. Forward-looking commentary should not be misconstrued as investment or financial advice. The advisor associated with this podcast is not monitored for comments, and any comments should be given directly to the office that the contact information is specified.

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