We are very pleased with the economic outcome during Q4. Signs indicate the bear market has finally ended and the early stages of the next bull market have begun. It has been a long time coming and we believe it will be well worth the wait.
As we discussed last quarter, markets traded lower at the end of Q3 and into Q4 based on inflation concerns and sharply higher long-term interest rates. Although concerned, we felt both bond and equity selloffs were excessive. Q4 quickly saw a complete reversal as long-term bond rates fell from 5% to under 4% asinflation data was reported well below the levels feared. This occurred while GDP growth was reported above 5% and unemployment remained below 4%. Combined, these factors drove equities up by 12%.
Redefining the environment from a bear market to a bull market matters more than just the semantics. Given the existing inflation data and pricing strength across the bond market, the Fed has now signaled that we may have reached the end of this interest rate cycle. This should boost the economy, especially for consumers, housing, and corporate investment. Bank balance sheets are all-of-a-sudden in much better shape. Rather than a feared potential recession, it now appears that 2024 earnings growth may reach 10%. Falling interest rates and rising earnings are the cornerstones of new bull markets. History tells us bull markets tend to last 3-5 years. If long-term interest rates stay near current levels, it’s reasonable to expect share price growth to track earnings growth during this timeframe and yield positive returns.
This may sound unrealistic given all the volatility and uncertainties of the past two years (along with 2024 being an election year). Our positive perspective is dependent on the continuation of some important trends; namely, inflation continues to trend lower, long-term interest rates stay below 4.25%, and unemployment remains below 4.25%. Rest assured, we will focus on the continuing changes in these metrics, as well as corporate earnings guidance for 2024. Even if this data continues to improve, it would be normal for a shortterm pullback to occur given the recent strength in the market. However, as time passes, interest rates and earnings should determine the long-term direction. At this point we are optimistic on the outlook for the next few years.
Recent years have highlighted how volatile trends can be. SFE manages clients’ portfolio risks through diversification and asset allocation. Equally important is that we constantly monitor the economic and earnings fundamentals that support your investment holdings in the overall environment; and make adjustments as needed. As always, our focus is on well-managed companies that we feel secure holding long term. The positive earnings environment that’s forecast should provide these companies with greater free cash to support dividend growth, share buybacks and corporate investment. We believe this should lead to strong performance in support of our clients’ long-term investment objectives.
We wish to thank all our clients for your continued trust and confidence in our investment services and wish you all good health and prosperity in 2024. Happy New Year!
Disclosure Statement
SFE Investment Counsel is a Registered Investment Adviser. This presentation is solely for informational purposes and not a solicitation to invest. The results reflect the deduction of fees and the reinvestment of dividends and other earnings. Advisory services are only offered to clients or prospective clients where SFE and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by SFE unless a client service agreement is in place. Please contact a financial advisory professional before making any investment. 801 South Figueroa Street│Suite 610 │Los Angeles CA 90017 │213.612.0220 t │213.612.-0329 f │sfeic.com SEC Registered Investment Advisor