As Market Glides Higher, Mind the Tips of Your Skis

Equity markets closed 2023 with a flurry of gains, and the market has continued to glide higher in the early weeks of 2024. Much of the gains have to do with expectations around future Federal Reserve rate cuts and expected soft landing for the economy. In this latest edition of LPL Street View, we will take a brief 30,000 foot view of what's ahead, what the market will have to digest in the coming quarters, and a reminder that the smooth ride we have witnessed in recent months likely has a limited shelf life. What's the point? Given the macro events to take place this year, 2024 will not be a year where investors should feel comfortable leaning too far over their skis. While debating a directional change in Federal Reserve policy has always been a part of stock and bond market forecasting over the past five to 10 years, the speculation over monetary policy has gotten even more attention as markets increasingly hang on to policymakers' every word.

Well, the activity over recent months has been no different as speculation over potentially six to seven rate cuts this year has caused markets to pile up some gains. We believe there are likely will be four rate cuts. Fed Chair Powell recently cooled the six to seven rate cut speculation by saying a March rate cut is unlikely, but the Federal Reserve guesswork will continue and investors should be reminded that markets could swing in tandem with the monetary policy pendulum. In 2024, about 50% of the world's population will be headed to the polls. As elections in 64 countries will take place this year. A regional European Union election is also on the docket. Perhaps no election will get more attention than the presidential election here in the United States. A mention that the lead-up to the U.S. election will likely be a volatile period for markets is an understatement.

And while post-election markets typically do find a constructive glide path, the tumult ahead of elections this year should indeed be formidable. While long-term investors should not alter their investment plans, tactical investors should indeed tread lightly. And finally, we can often get a sense of where we are going. By understanding where we have come from. Here, a picture is maybe worth a thousand words. The Volatility, or VIX, Index is indeed not a perfect forecasting tool, but it does provide a read into potential complacency in the market. Low volatility readings like we are experiencing now are often followed with periods of higher volatility for markets. Simply a reversion to the mean. History and this chart shows this to be true. Given what we have ahead of us in 2024, there should be no room for complacency in market dynamics. The message here, we believe both equity and bond markets should provide notable gains in 2024, but we also believe investors are likely in for a bumpy ride. Thanks for listening, and as always, allocate wisely.