We invite you to watch our latest video, “Agili Market Insights: Winter 2024.” A full transcript of the video, featuring Michael Joyce, is below in italics.
Transcript:
Hi. This is Michael Joyce with Agili, Your Personal CFO – and I’m pleased to share with you our thoughts and viewpoints for the Winter of 2024.
2023 Ends with Sensational Investment Returns
The year 2023 ended with really some sensational returns. And a lot of this was due to some better-than-expected inflation numbers, which has given a lot of optimism about the so-called “soft landing.” Now, I’ve been hearing a lot about a soft landing in the financial media, and I have to be honest, I don’t really know what a soft landing is. I don’t know if it means you’re jumping out a window onto a soft mattress or what that means.
Economic Headwinds
Waning Economic Growth
But what we do expect going forward is that we’re going to see a lot of headwinds and tailwinds. It would not surprise us in 2024 if we see a little bit of waning of economic growth, in particular, in the service sector, which has really done very well over the past couple of years. But it’s not going to be terrible. It might mean that Debbie Paul [Bethlehem Office Manager], instead of her taking four cruises this coming year – maybe she’ll just take two cruises. Something like that.
Credit Stress
We also do expect to see a little bit more credit stress in 2024. The Federal Reserve has raised rates quite a lot over the past couple years but that’s really impacted people that have short-term interest rate exposure. So, think about people that have credit cards or most small business loans from banks are variable rate loans. People in corporations that have long-term fixed rates that were fixed before short-term interest rates went up, they haven’t really felt it so far. But they’re going to start to. They’re going to start to see some of this debt coming due that they have to refinance or re-fund at a higher rate. And that’s going to raise interest expense and that’s going to create more credit stress. We’ll see a little bit more of defaults but remember defaults are still very low. And we don’t think, again, don’t think that this is going to be a horrible type of situation.
Economic Tailwinds
Household Liquidity
But there’s also going to be some tailwinds. There is still plenty of liquidity – households have plenty of money left over, so even if they’re not spending at the same pace, they’ll still be able to spend quite a lot. The lower quintile in terms of income, they’re going to be hurting a bit more, but generally households in our economy have plenty of money to spend.
Stimulus Surplus
Moreover, governments – municipal governments, state and local governments – which got a lot of stimulus money still have a lot of that left. Over 50 percent of the stimulus money that they received has still not been spent. But it will be. It has to be. They have to spend it over the next couple of years. So that means there’s going to be a lot of money that’s already been appropriated but has not yet been spent that will be spent – and that will provide some ballast to the economy, even if there’s other parts of the economy that will slow down. So, from an economic standpoint, it may be a little bit of a mixed bag, but it’s going to be headwinds and tailwinds.
Market Valuations
Now if you look at market valuations after we finished the year very strong, we see that the stock market indices are a little bit rich. You know, they might appear to be a little overvalued. But it’s important to remember that just seven stocks — they call “the magnificent seven” — generated most of the returns of the S&P 500 last year. If you take those out, there’s still a lot of good valuations in the stock market. In some cases, these are companies that have paid dividends for decades without fail – they’re market leaders. So, there is definitely still pockets of value in the market.
Slowing Inflation
Slowing Inflation’s Impact on Short-Term Interest Rates
We also have to look at interest rates. You know, inflation is definitely slowing, and the Fed is probably at the end of their rate-hiking regime. In fact, the markets are pricing in a number of rate reductions by the Federal Reserve even early in 2024. Now I don’t know when those are going to happen, but probably short-term rates will go down. If I look at the majority of my career, up until 2011 – the first 29 years of my career – short-term rates as measured by the 3-month treasury bill – those rates have been right around the rate of inflation. But starting in 2011, we had quantitative easing, and that pushed rates down to zero. And they stayed there for about ten years. But those days, I think, are done. Short-term rates will probably go down to about the rate of inflation. So, if that turns out to be 3%, that’s where we’ll be. If we eventually get to the Fed’s target of 2%, that’s where short-term treasury rates will be.
Slowing Inflation’s Impact on Long-Term Interest Rates
Now longer-term rates, there’s generally a term premium with longer-term rates. It can vary a lot. You know, it can be on 10-year treasury notes it can be between 1 to 2% over a three month treasury bill. So if inflations settles in at around 3% and the three month treasury bill is at 3%, that would mean that the 10-year treasury note should be about 4 or 5%. And where we are right now, it’s actually a little bit below 4%. So probably longer-term rates are about where they should be, at least for right now.
Optimistic about Long-Term Investments
But these are things that we’re looking at for the short- and intermediate-term. When we’re investing, we’re generally investing for long-term, because people have long-term goals and objectives. And over the long-term, I’m very optimistic. I think that over the years, people that have invested in risk assets like stocks have had returns that have handily outpaced inflation. And there’s no reason to think that that can’t continue to happen.
If you look at – if you go back 50 years – global economic growth has gone up 25-fold. According to the OECD (Organisation for Economic Co-operation and Development), since 1990, infant mortality has been halved, literacy rates have been doubled, and poverty rates have gone down by 40 percent. According to the economist, Michael Strain, ¾ of the people who are in their 40s right now — have higher inflation-adjusted incomes than their parents did. So, things have been good – and will continue to get better – and if you are investing for the long-term to meet your long-term goals and objectives and you’re a patient investor, that will definitely pay off.
Corporate Transparency Act
Now, I’m going to talk about something that some people will be subject to that’s a little bit esoteric. It’s called the Corporate Transparency Act. And it’s something that if you are an owner of an LLC or other type of investment like that – even if the LLC owns real estate – there’s going to have to be disclosure of who the owners are. And it is something that is meant to combat money laundering and things like that – which we applaud – but from the standpoint of compliance, it’s going to be a bit of a pain. There are a number of rules around this, so I definitely encourage you to contact your financial strategist at Agili to learn more about the Corporate Transparency Act and to see whether that impacts you.
Quarterly Estimated Tax Payment Deadline – January 16th
And then, last but not least, I do want to talk about a deadline that is fast approaching – January 16th – that is the last day to make quarterly estimated tax payments for the tax year of 2023. What you want to make sure of is that you paid in enough to meet the so-called “safe harbors” — which means you’ve paid in enough money on your taxes that you will not be subject to a penalty for under-reporting. If the safe harbor is still below what you owe in taxes, that’s okay – as long as you’ve met the safe harbor. Again, this is something to talk to your financial strategist at Agili [about] and he or she will help you know whether you should be making an estimated payment or if you have been making estimated payments to see if you have to actually make an estimated payment on January 16th.
I’ve been very happy to share with you our thoughts and viewpoints. If you do have any questions, again, contact your financial strategist at Agili or contact me. Thanks and have a great day.
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