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4TH QUARTER EQUITIES

Equity Market: The market was positive in the first half but took a pause in the third quarter. Then the Federal Reserve announced it was done with interest rate increases and might look at gradual reduction in 2024. Upon this news, the market surged ahead in November and December, led by the heralded Magnificent Seven which includes Nvidia, Meta. Tesla, Amazon, Apple, Microsoft, and Google. The market capitalization of these seven stocks is now bigger than the combined stock markets of Japan, Canada, and the U.K.  

The strong performance of technology is seen in the Nasdaq Composite Index which was ahead 13.37% in the fourth quarter and 44.64% for the year.  The S&P 500 was ahead 11.69% for the quarter and 26.29% for the year.  

The leaders in the S&P 500 have been Information Technology and Communications Services.  The Russell 2000 index of small stocks was positive by 16.93% for the year: with most of the gain 14.03% in the fourth quarter.  The Dow Jones Industrial Average also had an amazing gain of 13.09% in the quarter and ended the year ahead at 16.18%.  

The Market: Corporate earnings in the S&P struggled in 2023. The full-year forecast is for a modest 3.1% growth. Earnings are now expected to increase to about 11% in 2024. (LSEG DataStream). We note that earning growth needs to be strong enough to support the lofty valuations in stocks. The S&P 500 Index is now trading 19.8 times forward 12-month earnings estimates – well above the long-term average of 15.6 times.   We do not believe the market can move too far ahead if stocks are too richly priced.

Beyond this conventional issue of stock valuations, we have somewhat special concerns for 2024 about larger geo-political events that can affect the market negatively. The wars in the Middle East and Ukraine could unfold in ways that have negative outcomes on trade and energy flows. The election cycle in the U.S. also has circumstances we previously have never managed, and the impacts are unknown. We do not know how markets will react to a highly disputed election process.

On balance, we like the consensus forecast of 6% growth in the stock market. But we are vigilant about economic, political, and international events that can scuttle that positive outlook.


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