Jan 03 2024
January 3, 2024

4th Quarter of 2023

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Happy New Year! And that ends the positive aspect of this commentary.  Be sure to like and share.

The bull market that kicked off in October of 2022 continued almost to the last day of 2023.  Most of that rally was on the back of the so called Magnificent 7 stocks, basically a group of large cap tech, AI oriented stocks.  The S&P was up 24% for 2023, two-thirds of that came from the Magnificent 7 performance.  As we moved into the 4th quarter, the market began to rally across a wider span of stocks with the Dow hitting a record high and the Nasdaq turning in its best performance since 2020. The stock market is now more overbought than any time in the last 90 years.

 The 4th quarter rally was ignited by an announcement by the Federal Reserve that the rate hiking cycle that began in 2021 was over.  The Fed chairman even indicated that 3 rate cuts had been penciled in during 2024. On December 1st Fed chairman Jerome Powell flatly stated that there would be no rate cuts and that interest rates would remain higher for longer.  So, the announcement on December 13th that inflation was beaten came as a surprise.  There was a great deal of speculation on why the sudden change of direction.  But the stock market decided that didn’t matter and began running with the belief that rates would be cut not 3 but 6 or 7 times.  The market was expecting the 1st cut to come at the Fed’s January meeting.

Rate cut expectations fueled the market rally, but the reality is, a rate cut is not good news for the stock market or the US economy.  There was great expectation at the beginning of 2023 that the US would enter a recession sometime during the year.  It didn’t happen and the Fed’s anticipated rate cut was taken by many as a sign that the Fed had achieved a “soft landing” and there would be no recession.

No one knows exactly what will happen in 2024 but the economic indicators point not to a soft landing but what looks more like a burning barn dropping from the sky.

The Federal Reserve is a reactive group.  When it finally dawns on the Fed members that something has gone very wrong, they start cutting interest rates.  The word to the wise is sell after the 1st rate cut and begin buying after the last rate cut. 

The Federal reserve began hiking rates in March of 2021 after it became evident that inflation had become a problem.  The purpose of the Fed rate hikes was to restrict banking lending and dry up the flood of cash that had been dropped on US consumers by congress coming out of Covid-19.  The 2023 recession was in a big part held off by consumers, flush with cash spending like members of Congress, or drunken sailors.  But those consumers are running out of cash and available credit on their credit cards.

Credit card delinquency is surging to levels last seen going into the Great Financial Crisis.  Home foreclosures are starting to pick up along with late payments on automobiles.  There has been an increase in employees losing their jobs.  Expect that trend to continue.

The US GDP hit 5% in the 3rd quarter of 2023.  Expect a 4th quarter GDP closer to 1%.  And the GDI (income) has separated from the GDP reading and is indicating a recession.

Historically, the GDP and the stock market hit new highs immediately before an economic crash.

The US economy has been insulated somewhat from the recession racking the rest of the globe, thanks to consumer, federal and state government spending.  The global economy is dealing with a dollar shortage brought on in part by the collapse in global trading.  The best example is China which is racing into a depression.  Chinese deflation has been fueled by the collapse of the national real estate Ponsi scheme and the steep decline in global exports.  China’s chief trading partner, Europe is slipping deeper into recession with deflation becoming an issue for France and Italy.  Canada is beginning to report evidence of deflation.

Has the Federal Reserve beaten inflation?  We don’t know.  But the bond markets around the world are screaming that inflation is not the problem. 

Here is how I will approach investing as we move into 2024.  I understand the risk that inflation may return but I see deflation as the bigger risk.  The Fed’s sudden move toward rate cutting may indicate they see the same risk.  The US banking industry is running on fumes.  There is no lending.  There is a major problem developing with the renewal of commercial real estate loans.  The weakness in the banking industry could be the driver behind a Fed rate cut.

I began reducing our exposure to the equity market in July of last year while adding long term treasury positions.  Yes.  I was early but we did have a recovery during the 4th quarter.  As we move into 2024 I believe we are headed for a steep drop in the stock market and a steep climb in the long duration treasury bonds.  We will remain at a 30% exposure to bonds through the EDV and TLT positions.  We will also remain overweight in commodities, including gold and energy, and utilities.  Financials and international positions will continue to be left out of the portfolio.  I will monitor our equity exposure with a bias toward reducing those positions further.

Other issues that bear watching include the presidential election in November as well as the election in mid-January in Taiwan.  The tension is picking up in the South China Sea between China and every other country in that area.  Iran has imposed a blockade in the Red Sea.  The blockade will have little impact on the US but will directly impact Europe and Asia.  The South China Sea and the Red Sea could become flash points drawing in the US military. 

The world is in recession, and I believe 2024 will be the year the US joins the party.  There are indicators that it could be a very rough ride.

 Thank you for your continued trust.  If you have any questions, please feel free to contact me at (865) 368-1917.  That is my cell and I look forward to talking with you.