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We were skeptical during most of 2023 about the prospect for a booming stock market, given our prediction for a modestly positive year.  Like so many other market pundits, we happily erred on the negative side. At the outset of 2023, the consensus forecast was for the S&P 500 to trade in the low 4,000 range. Instead, it ended the year at 4,768.

So what happened? The dominant concern a year ago was that the Federal Reserve’s battle against inflation would push the economy into recession. But, almost remarkably, inflation appears subdued, and the economy is buoyant. So indeed, the market celebrated in the fourth quarter.

The major institutional money managers are now upbeat about 2024. Of the 10 biggest institutions, the median year-end forecast for the S&P 500 is 5,068. That would be a 6.3% increase for the year: a healthy but not overblown outlook.

At Hudson Advisors, we want to share this optimism. But we do not live in Barbie Land. We have caveats and concerns. First, a slew of economic things could still disrupt the Goldilocks soft landing scenario. Some of those concerns have crept into the market in the early trading days of January. Second, more than in most years, “black swan” events such as turmoil in the Middle East or in the U.S. elections potentially could negatively impact the market.

Our clients at Hudson Advisors know that we exercise caution in their portfolio strategies. We are defensive in the short-term while we look for winners in the long-term. That approach will continue to guide us in 2024.

The Economy:

The U.S. economy has been oddly unpredictable in the post-pandemic period. Inflation had surged to over 9% in 2022.  In response the Federal Reserve moved interest rates higher by 500 basis points in a brief period. Such aggressive monetary policy historically has produced at least a mild recession. But the GDP is expected to show growth of 2.6% for the full year 2023. Labor markets are strong with unemployment consistently under 4%.  Consumer spending is healthy. Inflation is now in about a 3% annualized range.

Higher interest rates can have a lag effect. The economy will slow in 2024 to between 1% and 1.5%.  But very few economists or market forecasters are talking about recession now. The so-called soft- landing projection is dominant, and the expectation is for the Fed to start a tapered lowering of interest rates.

However, some commentators have a “too soon to relax” perspective. We share this perspective at Hudson Advisors. The Fed may not move rates lower until it reaches its 2% inflation target. Should inflation ratchet back up, the Fed would raise rates yet again. That situation would bring potential recession back into view. In short, we are hopeful but not ready to declare that sustainable economic recovery has been achieved.

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