Complacency Can Kill Your Portfolio

The rally since late October has been impressive, but I think investors are getting ahead of themselves as we head into 2024.

There are definitely some positives in the market right now, as well, so let's get to them first. First, it has been a broad-based rebound since the recent lows and for one of the few times this year the rise has seen some good breadth. The small cap Russell 2000 has gained some 15% over the last seven weeks. The pullback in rates also should benefit the housing market and consumers are the margin. Falling fuel prices are a much-needed boost to individuals and the transportation sector.

More recently, the major indexes rose once again across the board in trading action Tuesday with the Nasdaq leading the way with a gain of .6% on the day. Oil continued to sell off, dropping nearly 4% yesterday, to end the day at $69 a barrel on the WTI. The yield on the 10-Year Treasury fell slightly to 4.2% as the November consumer price index came in largely as expected. The Federal Reserve is widely expected to keep interest rates steady at the end of their meeting later today.

But let's not ignore the negatives most seem content to overlook at the moment. Core consumer price, while down substantially from its highs, is still running at 4% on a year-over-year basis. Given both the Federal Reserve and the International Monetary Fund are currently penciling in 1.5% gross domestic product growth for the U.S. in 2024, this means we are entering 2024 against a stagflationary backdrop. Something that doesn't seem in any way to be priced into the current markets.

Nothing is getting better in the commercial real estate sector, either. Another large office building in Los Angeles was sold this week with a 60% discount to where the property was purchased in 2017. Delinquency rates on debt in the office sub-sector have more than tripled over the previous 12 months to just north of 6%. I could see delinquencies doubling again in 2024. The current delinquency rates on hotel and retail properties are also up over five percent as well.

Then there is the 800 pound gorilla as far as debt levels go: the federal government. The Federal deficit for November came in at $314 billion the other day, some $13 billion above expectations and $66 billion over the same period a year ago. And that was with federal revenues being up nine percent on a year-over-year basis. In addition, while some states like Florida and Texas are running large surpluses, others are in trouble heading into the New Year. California's projected deficit for 2024 has ballooned from $14 billion in June to $68 billion as one example. At some point, deficit spending, which has been a key driver of growth this year is going to have to be whittled back substantially.

Finally, the market hopes for numerous rate cuts in 2024, but there is a divergence between investor and central bank opinion. The Fed currently sees one or two quarter percentage point cuts in 2024, even as the market is pricing in four to five. The recent rally has been fueled in a large part by those investor hopes that easily could be dashed in 2024 if the "last mile" on the inflation front is difficult. More importantly, from a historical perspective, the Fed only starts to drop rates significantly after the country is already in a recession. Something that most definitely that is not priced into the current market indexes as we close out 2023.

At the time of publication, Jensen had no positions in any security mentioned.