This time last year, we would never have guessed that the S&P 500 index would end 2023 up about 26%, including the dividend, which was lower than usual, around 1.4%. We headed into 2023 with price-to-earnings ratios just slightly above their long-term average and inflation around 6.5%. Of course, the Magnificent Seven—Meta Platforms, Amazon, Alphabet, Tesla, Microsoft, NVIDIA, and Apple—dominated the market, especially in the first quarter. In the second half of the year, we saw more broad participation among the gainers. Ending the year, the Federal Reserve is managing interest rates between 5.25% and 5.5%, inflation is a little bit lower at 3.14%, and the average price-to-earnings ratio is around 22.9, meaning investors, on average, are willing to pay almost $23 for every dollar of earnings on their investments.
Heading into 2024, it appears as if the market considers inflation tamed; however, given the varied economic conditions, the distribution of outcomes in 2024 is sizable. We could see inflation come back. We could see a mild recession. We could see the soft landing we were promised. We generally use a simplistic valuation model to predict future returns for the S&P 500, and over the long term, it is much more accurate, predicting an 11.88% annual average return since 1988. Short term is another story. Last year, the average P/E was around 18.7, and our valuation model yielded a prediction of 13.09%. The S&P index doubled that—it outperformed anything that even Wall Street, as a whole, expected. This year, our valuation model indicates an 8.29% return for 2024. With stocks trading at a 16% premium, that aligns with a prediction of a less-than-average year ahead.
However, short-term predictions tend to miss the mark across the board due to the inherent volatility of the stock market. Wall Street is historically bad at predicting market returns on a year-to-year basis. For 2022, consensus estimates were for a 4.5% return, and the S&P lost more than 18% for the year. As recently as August, Street estimates for 2023 were for a 17% return, and in a matter of four months, we are at roughly 26% for the year. Needless to say, financial market forecasting is very difficult and can be a great source of humility—generally, unwelcome humility.
This is one of the reasons we apply the Henssler Ten Year Rule, whereby any assets needed for consumption within the next 10 years should be held in fixed income assets (bonds or CDs). Any assets not needed within the next 10 years should be held in stocks (equities) as they have proven to outpace inflation, therefore growing an individual’s wealth in the long run. This alleviates the need to “be right” when the market moves in one direction or another and stay invested, knowing history has shown us the long-run benefits of holding stocks.
We’re certainly not telling you to sell and wait it out because models may indicate a weak year. You should stay with your strategy based on your individual spending needs and risk tolerance. If you’re looking to put money into the market, dollar cost average to take advantage of market dips. By doing so, you mitigate the impact of individual trading days on your investments. Additionally, we believe that in 2024, the S&P 500 stocks are likely to finish positive, but Small- and Mid-Cap domestic companies and international companies are likely to outperform due to their more attractive current valuations; therefore, a well-diversified portfolio should benefit most investors.
If you have questions on how to position yourself for 2024, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166
Listen to the December 30, 2023 “Henssler Money Talks” episode.
This article is for demonstrative and academic purposes and is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
