By Eric Reich
The world has certainly seemed unsettled lately. We are still in the middle of Russia’s invasion of Ukraine. China’s economy is a mess and squarely in a recession. Europe’s economy is better but still in a recession. Iran is trying to cause chaos, first in Israel by sponsoring the Hamas attack and now in the Red Sea by supporting the Houthi rebel attacks on ships. Inflation is declining, but still an issue and causing market upheaval. Of course, we are also all too well aware that this is an election year. For obvious reasons, investors are left wondering what to do with their money in this unsettled world.
First, let’s address the implications of all of the above for the U.S. While the U.S. is not in a recession, there is certainly still a possibility of one happening. Higher interest rates from the Federal Reserve raising rates will cause spending to slow down. Lower spending means a weaker economy. While this was the intent of the Federal Reserve in order to control inflation, there is a fine line between reducing inflation and causing a recession. So far, the Fed has done a good job of walking that line recently but I’m not certain we will entirely avoid some problems later this year. The reason is that while inflation is pesky and just won’t seem to go away, there is a lot of pressure on the Federal Reserve to cut interest rates. The obvious reason why is that this is an election year, and they need to make their guy look good. There is, however, a far more impactful reason that I don’t really hear people talking about very much. 30% of all U.S. government debt comes due in 2024. Go ahead, read that again. The U.S. currently spends roughly 15% of its revenue servicing debt. The higher interest rates are when that debt comes due, the more the U.S. must allocate towards paying their debt service. The U.S. has allocated 18% for 2024 in anticipation of higher interest rates which may or may not be enough. That said, if the Federal Reserve lowers rates, the amount needed to service the debt decreases as well. These two reasons combined will certainly lead to lower rates in 2024, but I do not believe we are looking at 6 rate decreases this year for an anticipated 1.5% overall reduction in the Federal Funds Rate. I think four cuts for a total of a 1% reduction is more likely unless conditions change, which can certainly happen.
If we believe that the above is at least partially likely, then what do investors do with their money? Well, since everyone’s situation is different, you should talk to your financial advisor about your specific situation. That said, here are a few things that I am doing for myself. I firmly believe that the days of 5+% money markets and CDs are soon to be over. I would expect much lower rates on those instruments by the third quarter of 2024. My alternative to that is intermediate-term bonds. I really think bonds in the 5- to 7-year range look attractive to me right now. I still believe that for stocks, U.S. large company growth will likely be the leader this year. However, be warned that while the S&P 500 returned 26% last year, if you carve out the “magnificent 7” stocks (Apple, Microsoft, Amazon, Nvidia, Meta, Tesla, and Google), which had a combined performance of 111%, the rest of the market only equaled 6%. I expect them to continue to lead the rest of the S&P in 2024.
One of my favorite quotes is, “When you don’t know what the market will do, do nothing.” Don’t make radical changes to your portfolio in times of uncertainty. This is a surefire way to get burned. I believe 2024 will be just fine. Yes, it will be bumpy along the way, but that is to be expected. Don’t make big moves. Above all, call your financial advisor and make sure your current portfolio is right for you and your risk level.
Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Reich Asset Management, LLC is not affiliated with Kestra IS or Kestra AS. The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. To view form CRS visit https://bit.ly/KF-Disclosures.
