Mid-Year Update: My ‘What if’ Scenarios for 2024

1) What if the 2024 election creates stronger economic growth to pull us out of a recession? (Yes, I believe that’s where we are!)

The Wall Street narrative at the end of 2023 suggested we will see a minimum of three rate cuts from the Fed in 2024. Logic suggests that this doesn’t happen unless we are in a recession. And that’s where my thinking is as I write this. I’m not confident that the data is as reliable as many are stating. There is ample evidence that the economy is not growing at a rate that is being reported. For example, for the 15th month in a row, ISM Manufacturing survey signaled no expansion in December¹. Its key indicators suggest manufacturing is shrinking. Shrinking means recession, and the TRUE economy that makes things appears to be in recession.

In addition, the government quietly erased 439,000 jobs through November 2023, a closer look at the numbers from the Bureau of Labor Statistics shows². That means its initial jobs results were inflated by 439,000 positions, and the job market is not as healthy as the government suggests. Private sector job creation also was adjusted lower by 358,000 in that period, while government payrolls were revised by an increase of 52,000. Today, U.S. labor force participation is at a historically low 62.5%.

From my perch, this doesn’t necessarily bring bad news for investors in 2024. As the Presidential election dominates the news cycle, don’t bet against a rising stock market in what will certainly be a political business cycle. History has shown us that the Fed and the incumbent administration will do everything possible to stimulate the economy, all in an effort to improve the prospect of the administration getting reelected. Heading into 2024, it is important to note that the S&P 500 has not declined during a presidential re-election year since 1952 and has averaged a 12.2% annual gain in re-election years³.

We have already seen signals from the Federal Reserve that they will cut interest rates. The effect could loosen lending standards to smaller businesses and consumers, and pockets of capital may be found that will be directed toward the economy and induce a boom (real or artificial) before the election. It could lead to expansionary policies such as tax cuts or increased spending leading up to the election.

It is not a stretch that the current administration may also introduce or repeal regulations that impact businesses and industries with the aim of gaining political support or appeasing certain interest groups. Infrastructure spending with the promise to create jobs and stimulate economic activity could also reemerge as a centerpiece of 2024 policy.

UPDATE: I believe this analysis remains spot-on, even though a seismic wave has overcome this year’s presidential election. With President Biden being replaced by Vice President Harris as the Democratic Party nominee, I still believe we remain in a political business cycle. The incumbent administration’s policies will largely remain in place with Harris as the nominee, and as the election draws nearer the extreme contrast in policy initiatives (and posturing) by the candidates is still quite evident. I continue to believe we are closer to a recession than not. Is unemployment low? How far has inflation actually come down? Is the Fed prepared to lower interest rates as is now expected by Wall Street? Will one rate cut, as is now the expectation, be enough to stoke another stock market rally? For those politically and economically attuned, high interest rates are still a primary issue. Historically, they have foreshadowed a recession. And in the partisan world of budget projections, economists on both sides forecast the doom of future federal budget deficits and overwhelming national debt - accompanied by scary stories of cutting social programs and raising taxes. Unless you are committed to your well-designed financial plan, the election season will create many distractions that could cause you to change course unnecessarily. But if you remain steady in your convictions, I expect us to come out of the chaos just fine.

2) What if the stock market continues to broaden beyond ‘The Magnificent Seven’?

The dominant market theme in 2023—and likely heading into 2024—has been the supremacy of the "Magnificent 7" group of mega-cap stocks: Alphabet, Amazon, Apple, Meta, Microsoft, NVIDIA, and Tesla. Together, they have swelled to represent about 30% of the S&P 500’s market value, according to Goldman Sachs Global Investment Research. All have been involved in the innovation of or have benefitted from the emergence of Artificial Intelligence (A.I.). Our participation has been focused on passively owning the index at-large. Even so, we understand these companies are not immune to the business cycle and can even be a drag on cap-weighted indexes. This underscores our emphasis on diversification when it comes to the mega caps as well as the rest of the market. Our focus heading into 2024 remains on dividends/quality investing in companies with strong free cash flow, plentiful cash on the balance sheet and healthy real revenue growth as debt servicing costs remain important.

While equity markets broadened at the end of the year—with nearly all styles, capitalizations, and geographies generating positive returns in November and December—certain parts of the market remain undervalued, especially in comparison to the Magnificent Seven. This basket of undervalued assets could include smaller-capitalization value stocks. Sectors may include banks, healthcare, biotech, utilities and communication services as well as more cyclical sectors affected by changes in the overall economic cycle, such as consumer discretionary, industrials, and materials. We have seen a rush to spend money on services such as tourism and restaurants, while manufacturers and sellers of goods and ‘things’ have become undervalued.

UPDATE: The broadening still hasn’t happened. With the exception of Tesla’s stock dropping by more than 25% earlier this year, the dominance of the remaining Magnificent Seven has become even more pronounced. For the market to broaden, especially in the important real estate and biotech sectors, we need to see lower interest rates. This, accompanied by a more conducive regulatory environment particularly in regard to energy, it would be a boon to the economy. Even though it has pulled back recently, we certainly can’t overlook technology going forward as NASDAQ has hit record highs in 2024. More companies in this sector are making noise but they may come with risk as many are still not even profitable. As we have seen in previous boons (such as the dot.com era), it is most prudent to stay the course and let the market separate winners from losers.

3. What if runaway debt leads to a return to the gold standard?

As I write this on my birthday, it may appear that I have been celebrating a little too hard, but the return to gold may not be such a far-fetched idea. Particularly since gold is trading at an all-time high today. For a nation that can be swiftly impacted by executive orders from Presidents, it is important to keep in mind that when President Richard Nixon ended the previous gold standard era in 1971, he did so under executive order. He eliminated the fixed convertibility between the US dollar and gold and made the dollar a fiat currency. Nixon directed Treasury Secretary Connally to suspend, with certain exceptions, the convertibility of the dollar into gold or other reserve assets, ordering the gold window to be closed so foreign governments could no longer exchange their dollars for gold.

If the United States fails to control its deficits, the US dollar may lose its status as the world’s reserve currency. Looming debt restructuring and potential defaults may soon lead to a global monetary reset. Some nations are already trying to reduce their dependence on the dollar. Reserve currencies rise and fall as part of long-term cycles, and every reserve currency runs the risk of being replaced. It begs the question: Can the United States just grow its way out of its current deficit levels? Our predominance in growth industries like technology might suggest we can. Otherwise, the only tools that may be left for policymakers in government are higher taxes and budget cuts. While higher taxes could raise federal income in the short term, it would likely reduce economic growth in the long term. It may take a change in leadership, but don’t entirely count out a return to a gold standard by the U.S.

UPDATE: One of the presidential candidates (Trump) has hinted at going back to the gold standard on several occasions. Having such a foundation would avoid the current practice of the Fed operating like a margin account for the US economy. I wouldn’t take gold off the table. Gold is up more than 17% since January, due to a confluence of geopolitical risks, rising interest rates, and deficit concerns⁴. As far as the U.S. growing its way out of debt, lower taxes and less regulation on American industry would be a huge step in the right direction.

4. What if Travis Kelce launches a country music singing career after the Chiefs are eliminated from the NFL playoffs?

A fan of country music, Kelce performed a duet with Kelsea Ballerini at the 2023 CMT Music Awards. When girlfriend Taylor Swift began incorporating more pop influences into her music, some fans accused her of abandoning her country roots and becoming too commercial. Kelce’s popularity may be just what Swift needs to salvage her struggling career.

UPDATE: Ok – the Chiefs won again and my prediction of a singing career for Kelce have been squashed. But word now is that he is working to financially support his mother's dream of owning a food-related business in Italy. Can a reality show on the Food Channel cable network – The Catchin’ Gourmet or Kelce’s Kitchen - be far behind?

So, as I reviewed my what-if scenarios from January, one thing consistently remains true. When you instill critical thinking and a long-term perspective—and ignore the short-term noise created by the news cycle—as part of your financial plan, you have a good chance of winning. If like most of our clients, you stayed true to your plan in 2024, then the year has probably been good to your portfolio and the rest of your long-term financial plan. Just stay focused the rest of the way and don’t be distracted by the theatrics of the November election. Let’s keep it going!

Thanks for reading.

Dave

Sources

¹ Institute of Supply Management, https://www.ismworld.org/supply-management-news-and-reports/reports/ism-report-on-business/

² Bureau of Labor Statistics, Employment Situation Summary https://www.bls.gov/news.release/empsit.nr0.htm

³ U.S. News & World Report ,https://money.usnews.com/investing/articles/election-2024-how-stocks-perform-in-election-years

⁴ https://www.bullionbypost.com/gold-price/6-month-gold-price-per-gram/