Stocks and bonds continued their upward trajectory in December. Markets cheered the good news on US inflation and showed a willingness to accept lower yields. In this piece, we briefly summarize December in the market and economy, and survey the potential rewards and risks ahead.

Market

Both US and international stocks rose yet again last month, as global stocks returned 4.80% [1]. Despite large swings and great disparities among them, global stocks returned 22.20% in 2023 [1]. A volatile year, but “all’s well that ends well.”

Major bond indices also rose, with the Bloomberg US Aggregate and the Bloomberg Global Aggregate Ex-U.S. indices gaining 3.83% and 4.46% respectively [2].

Economy

US leading economic indicators remain negative [3]. We believe the US stock market welcomes the prospect of a slight economic decline – the minimum required to lessen inflation. A sudden, volatile drop would not be appreciated.

Shelter costs represent one of the last battles in the war against inflation. Fortunately, national rental prices are decreasing [4]. If this trend continues, the Federal Reserve’s justification for lower US interest rates will be reinforced.

The most restrictive global monetary environment in thirty years finally ended in 2023 - the number of central banks reducing interest rates now exceeds those raising interest rates [5]. Inflation continues to show broad downward progress across developed and emerging economies [6].

Bonds – Down, then up, now what?

Global central banks have dominated fixed income markets in recent years, controlling the ocean upon which all fixed income investors sailed. After sinking many ships in 2022 and 2023, Poseidon is now providing a gentle tailwind. With less external influence, fixed income investing will require individualized attention and discernment.

Two examples:

1. Municipal bonds have performed exceptionally in the last two months [7], and their after-tax yield remains appropriate. However, if their historic momentum continues a little bit longer, causing their yields to fall a little bit further, they are candidates for replacement by competing sources of conservative return.
2. US floating rate loans are compelling, and we allocate to them for client portfolios where appropriate. Their yields are attractive compared to their history and to their corporate peers [8]. While we expect the interest payments on these loans to fall as their underlying interest rate indices “float” lower [9], today’s high yields cushion against that possibility. If we are wrong and the indices rise, we believe these loans will perform relatively well, as they did in 2022 [10].

Looking ahead

We are excited about the future returns, net of inflation and fees, for several investment categories. We believe our client portfolios will benefit from stocks that lagged last year, and from bonds with attractive yields.

Nevertheless, we are closely watching geopolitical, budgetary, and technological developments that could alter our investment views. Global politics will be particularly interesting in 2024 - approximately half of the world will have the opportunity to vote in national elections this year [11].

In the presence of unavoidable uncertainty, our approach to investing will remain thorough, deliberate, adaptable, and intellectually honest. The unpredictable future will prove us right in some years, and it will prove us wrong in others. We are confident that our client-centric, focused expertise will benefit our clients over their investment horizons.

Interested in discussing the markets and your portfolio? Contact us, we’re here to help.

¹ Eaton Vance: Monthly Market Monitor, January 2024, slide 24, https://www.eatonvance.com/monthly-market-monitor.php

² Eaton Vance: Monthly Market Monitor, January 2024, slide 7, https://www.eatonvance.com/monthly-market-monitor.php

³ The Conference Board: US Leading Indicators, https://www.conference-board.org/topics/us-leading-indicators

⁴ Redfin: The Tide Turns for Renters as Asking Rents Post Biggest Decline in Over 3 Years, https://www.redfin.com/news/redfin-rental-report-november-2023/

⁵ J.P. Morgan: Eye on the Market, Outlook 2024, page 2, https://am.jpmorgan.com/us/en/asset-management/institutional/insights/market-insights/eye-on-the-market/outlook-2024/

⁶ J.P. Morgan: Guide to the Markets, 1Q 2024, As of December 31, 2023, slide 51, https://am.jpmorgan.com/us/en/asset-management/adv/insights/market-insights/guide-to-the-markets/

⁷ Morningstar: Bloomberg Municipal 1-15 Yr TR USD, +6.82%, 10/31/2023 – 12/31/2023

⁸ J.P. Morgan: Guide to the Markets, 1Q 2024, As of December 31, 2023, slide 37, https://am.jpmorgan.com/us/en/asset-management/adv/insights/market-insights/guide-to-the-markets/

⁹ CME Group: One-Month SOFR Futures and Options, https://www.cmegroup.com/markets/interest-rates/stirs/one-month-sofr.quotes.html

¹⁰ Morningstar: Morningstar LSTA US LL Index TR USD, -0.77%, compared to Morningstar US Core Bd TR USD, -12.99%, 12/31/2021 – 12/31/2022

¹¹ Time: The Ultimate Election Year: All the Elections Around the World in 2024, https://time.com/6550920/world-elections-2024/

The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not consider any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.

The views expressed in this commentary are subject to change based on market and other conditions. This communication may contain certain statements that may be deemed forward looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability, or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.

Generally, among asset classes, stocks are more volatile than bonds or short-term instruments. Government bonds and corporate bonds have more moderate short-term price fluctuations than stocks, but provide lower potential long-term returns. U.S. Treasury Bills maintain a stable value if held to maturity, but returns are generally only slightly above the inflation rate.

Diversification does not ensure a profit or guarantee against loss.

KLR Investment Advisors LLC (“KLRIA”) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where KLR Investment and its representatives are properly licensed or exempt from licensure.