The S&P 500 ended 2023 up 26.3% including dividends.
Unfortunately, a lot of folks missed out on the incredible rally.
It was hard to trust the rally, given the Fed’s unpredictability, a regional banking crisis and a slowing economy.
To be fair, things could have fallen apart just as easily as they held together.
Since we can’t change what happened in the past, it’s time to look forward to 2024.
There are three megatrends that will drive the conversation more than anything else.
We’ll explain what they are and how you can use them to build investment ideas.
But pay attention, because there’s one in particular that could change the way you approach markets forever.
#1 – The Not So Easy Fed
The Chicago Mercantile Exchange’s (CME) Fed Watch tool displays trader expectations for the federal funds rate for each meeting over the next year.
Current expectations point to a 60.4% probability that the Fed will cut rates by 0.25% in March.
By July, there’s an 82.6% probability priced in for at least a cut of 0.75%.
For December, over half of traders believe interest rates will be 1.5% or more lower than they are today.
We believe markets overestimate how quickly the Fed will ease off higher interest rates.
Yes, inflation has contracted significantly, along with business spending and consumer confidence.
However, unemployment remains stubbornly low.
And housing, one of the key drivers of inflation, appears to be bottoming.
In our view, that puts many of the high-growth tech names ahead of where they should be.
However, we believe that banks offer a unique, counterintuitive investment opportunity.
The general line of thought goes like this.
You don’t want to invest in banks right now because:
- Lower interest rates leads to lower net interest margins.
- Economic activity points to a recession, which is bad for the banks.
- Banks, especially the regionals, still have a lot of bad debt on their books.
However, we’re looking at this a bit differently.
Let’s start with net interest margin or NIM.
NIM is the spread between the rates banks pay you for deposits and the interest they charge on loans.
Most deposits accrue interest on short-term rates while loans are made on longer-dated rates.
Bond markets inverted last year, with short-term exceeding long-term rates.
When the Fed lowers interest rates, it impacts shorter-dated bonds more than longer-dated ones.
By lowering the yield on short-dated bonds faster than on long-dated ones, the Fed actually increased the net interest margin banks earned.
Now, let’s look at the economic activity argument.
It’s true that all indications point to a possible recession.
However, we’ve noted that housing volume and prices fell in the back half of 2023 and appear to have bottomed.
This means the forecasts for loans processed by banks should grow year over year, again benefiting their bottom line.
Lastly, we need to talk about the elephant in the room: April’s regional banking crisis.
Why did it happen?
Three reasons:
- Depositors pulled their money.
- The banks’ deposit bases weren’t diversified.
- Banks had invested too much of that money into short-dated bonds that were now underwater.
All of those problems have been rectified to some degree.
The depositor flight that took down Silicon Valley cleared the deck of banks that serviced a narrow group of clients.
And a lot of those short-dated maturities have already matured. Plus, the cost to hedge those bonds has dropped significantly.
All in all, banks are in a much stronger position than they were eight months ago.
So, if you’re looking for solid value plays, check out the KRE Regional Bank ETF and some of its components.
While the Fed may be the focus to start the year, things will quickly shift to the 2024 election.
Because in case you didn’t know…it’s going to have a large impact on everyone’s financial future.
#2 – Election Year Undercover
2024 is shaping up to be a rematch of 2020, where two octogenarians go head-to-head for control of the world’s dominant superpower.
Rather than address our crushing debt, politicians are more interested in playing political games and hammering each other on social issues.
Meanwhile, the average American is more worried about his or her financial future now than he or she was during the last election cycle, despite wage growth and low unemployment.
It’s truly amazing how the people who want to become the leaders of the free world are afraid to touch entitlements like they’re sacred cows.
We laid out our current fiscal forecast in a recent issue of the Wealth Whisperer.
Either we cut mandatory and discretionary spending by 25% now or face a tax hike of 33% sometime in the next decade.
Regardless of what people tell us, we can’t get there by cutting aid to Ukraine, SNAP programs and any other waste from the system. The math doesn’t work.
We HAVE to address entitlements.
And if you had to guess which political party is more likely broach the subject, who would it be?
Put another way, compare the economic growth from 2016-2020 and 2020-2024 and tell us who did a better job.
This election isn’t just about our moral standing. It’s about our fiscal solvency.
Every time we kick the can down the road, we add more volatility into the system.
Fortunately, that comes with plenty of opportunities.
#3 – Excess Volatility
The average investor looks at volatility as a problem.
They want their investments to appreciate in value steadily and consistently.
Given the Fed’s predicament and the upcoming election, they’re likely to see the exact opposite.
However, folks like Hugh Grossman take volatility and turn it into a second income stream.
You see, volatility isn’t just from one day to the next. It happens intraday as well.
And if you know how to manage your risk appropriately, these daily gyrations can become money springs.
Think about it this way.
Every year, we come across a handful of investment opportunities in which we have a high degree of confidence that they’ll create a nice payday.
The problem is that we’re lucky to find a handful during volatile markets, and hardly any when things are quiet.
That’s why Hugh’s Daily Paycheck method works so well.
After studying the markets for years, Hugh found a niche with such a powerful edge that he’s able to WIN 95% OF THE TRADES!
He takes volatility, which would normally scare other traders away, and turns it into a mechanical process that delivers consistent repeatable results.
2024 is going to be an amazing year.
Don’t miss your chance to cash in on the opportunity that can change your financial future forever.
