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2024 01 - Predictions Client Newsletter Thumbnail

2024 01 - Predictions Client Newsletter

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The 2024 Prediction Letter

The only thing we know about the future is that it will be different. -Peter Drucker

Only a fool would make predictions, especially about the future. -Robert McKay

You heard it here first: My prediction for 2024 is that the market will go up and down. To be any more specific than that is to play the part of a fool. Not that being shown to be a fool (sometimes repeatedly) has ever stopped anyone from making predictions.

According to Bloomberg, market strategists, on average, predicted a 2% decline for the S&P 500 Index in 2023. While that's the average, the number of analysts that got it right was approximately zero.

The most repeated prediction of 2023 that failed to appear was about the looming recession. Moody's Analytics economist Mark Zandi said, "Usually, recessions sneak up on us. CEOs never talk about recessions. Now it seems CEOs are falling over themselves to say we're falling into a recession. Every person on TV says recession. Every economist says recession. I've never seen anything like it."

My theory on this is simple: headlines sell. Our brains are wired in such a way that fear is a potent motivator. Pundits instinctively feed on this. Our only defense against the resulting FUD (fear, uncertainty, and doubt) is making ourselves aware of this.

In 2022, the Dow, the S&P 500 and the Nasdaq 100 experienced peak-to-trough declines of 21%, 25% and 35%, respectively. At the end of 2023, all three indexes were pushing toward new high ground on a total return basis (i.e., including dividends).

This is a continuation of a theme. Over the last hundred years, the average annual peak-to-trough drawdown has been around 15%. Average declines of nearly twice that have occurred irregularly, about every five years on average. Since WWII ended, there have been three declines averaging 50%, but the longest time to break even with dividends reinvested was five years and eight months (according to the Wharton School's Dr. Jeremy Siegel). These are scary facts if looked at in isolation. However, market indexes have consistently returned to their long-term trend line and said a different way: stocks can (and will) lose money in the short term but have consistently bounced back over longer periods.

The lesson we should take away from this is not that markets are scary but that we should focus on what we can control and ignore the pundits, predictors, and the market's ups and downs. As long-term investors, we are rewarded for implementing well-balanced portfolios and sticking with them.

The Soft Landing of 2023 and the Fed Outlook

The Federal Reserve continues to drive markets (and expectations). While inflation has not yet reached the 2% target rate, inflation continued to moderate through 2023. In late 2023, Fed officials indicated we might even see rate cuts in 2024. These comments drove the market higher at the end of the year (as lower rates are generally good for the stock market).

It looks increasingly like the Fed has pulled off the elusive "soft landing." This is a rare feat, as rapidly raising interest rates will often result in a recession. To review, the Fed started raising rates in March 2022, from zero in 2022 to an effective rate of 5.33% today (including a 1% increase in 2023). The yield curve remains oddly and stubbornly inverted. (In an inverted yield curve, short-term bonds pay more than long-term bonds; a normal yield curve sees increasingly longer-term bonds pay higher interest rates to reward investors for locking up their investment dollars for longer periods.) While we have theories as to why this has not repeated in this cycle, we believe, most importantly, that this is a correlated relationship and not necessarily a causal relationship. Said another way, the inverted yield curve is a symptom of the uncertainty of potential recession as opposed to the cause of a recession.

Tax Changes for 2024

The IRS adjusts several tax provisions and brackets based on inflation every year. This year, there are 63 updates and changes. Without these adjustments, it would be akin to getting a tax increase every year. Some of the most notable changes include income tax brackets, the "standard" deduction, the brackets for long-term and qualified income, gifting limits, estate tax limits, and retirement plan limits. For more info, click here.

We have been spending more time thinking about and working on and tax planning in recent years. We really appreciate you sending us your tax return so that we can give you the best advice based on the specifics of your situation.

Did you know the Federal income tax didn't exist before 1913 when the 16th Amendment was ratified? According to the National Archives, in 1909, progressives in Congress attached a provision for an income tax to a tariff bill. Hoping to kill the idea for good, a group of conservative legislators proposed enacting such a tax as they believed 75% of states would never ratify a constitutional amendment. To their surprise, the 16th Amendment was ratified in 1913, establishing Congress's right to impose a federal income tax.

Wrap Up

Strategists should not be completely ignored. They bring unique insights and observations to our attention. We are better informed because of their hard work. Many of them are brilliant individuals. They can provide useful insights. That said, they grapple with the unknown, which means the future is unknowable. I prefer to read the analysts who report, analyze, synthesize as opposed to predict.

As disciplined investors, we should avoid taking shortcuts, such as market timing, or trading on predictions, which can have a detrimental effect on achieving long-term goals.

I trust you have found this review to be informative. If you have any inquiries or wish to discuss any concerns, please don’t hesitate to contact me or any team member.

Thank you for choosing us as your financial advisor. We are honored and humbled by your trust.


This is being provided for informational purposes only and should not be construed as a recommendation to buy or sell any specific securities. Past performance is no guarantee of future results, and all investing involves risk. Index returns shown are not reflective of actual performance nor reflect fees and expenses applicable to investing. One cannot invest directly in an index. The views expressed are those of Chris Duke and do not necessarily reflect the views of Mutual Advisors, LLC, or any of its affiliates

Investment advisory services are offered through Mutual Advisors, LLC, DBA Context Wealth, an SEC-registered investment adviser.