Market Trends 2023 – Q4

The Weight of the Evidence

TLA continuously researches and monitors economic and market trends on behalf of the families we serve. The weight of the evidence led us to be defensive for the past two years and we remain so.

Why do we remain defensive?

First, there is still more market concentration and speculation than we would like to see. On the economic side, while the just-ended third quarter was quite strong, we are beginning to see cracks and headwinds, particularly for the weaker players in the economy. The end of COVID-related stimulus payments, the end of student loan relief, consumers’ credit fatigue (subprime loans, auto loans, credit card defaults), plus higher interest rates, political dysfunction, federal debt, tight credit, and labor strikes are all potential drags on the economy.

At the same time, while inflation has come down substantially in the past year, there are structural pressures that may act as a floor to prevent inflation from declining to the levels that the Federal Reserve wants; namely de-globalization, shrinking US labor workforce and higher oil prices. Speculation coupled with a slowing economy is not a good formula for investment success.

Why are we cautious, but not necessarily pessimistic?

Our experience has taught us that the U. S. economy is incredibly resilient. Every slowdown that we have experienced has been followed by innovation and growth to ever higher levels of prosperity. Despite our massive federal debt, U. S. Treasuries are still what the world wants to own. The U. S. remains a net exporter of energy, so while higher prices hurt the consumer, they continue to add to the U.S. GDP. A large percentage of current homeowners either have no mortgage or have locked in historically low rates. The national debt problem is not easy, but according to JP Morgan’s highly respected Chief Global Strategist David Kelly, it is “fixable over time without massive pain.” Finally, financial markets tend to do well after short-term rates peak.

With interest rates now at 15-year highs, we are beginning to see some potential positive opportunities, especially in the bond market. When we do begin to dip our toe back into a more traditional bond allocation, we intend to stay with higher quality.