Happy Year of the Wood Dragon! Note that the deadline for RRSP contributions deductible against 2023 income is February 29th (It's leap year). This is the first of a few perspectives on the 2024 Investment Outlook.
How Interest Rates Lead Stocks
The chart above illustrates how the direction of interests rates (the green line, left axis) has corresponded with the growth or decline in stocks one year later (the blue line, right axis). As you can see, they tend to move together, except, when interest rates suddenly jump higher, the percentage gain on stocks is usually lower a year later. And when interest rates drop, stocks tend to do better over the next 12 months.
Where should we expect stock prices to go next? Based on the historical patterns evident in this chart, Down! But there are other pressures that may keep stocks growing a little longer. Here are a few.
Markets can remain irrational longer than you can remain solvent.
John Maynard Keynes
The major technology companies have been the dominant influence on the stock market indices for several years now. These stocks may not be able to grow as fast in the future (Jeff Bezos just sold $4 billion of Amazon stock - coincidence?) . But there are many other companies outside the technology sector, that pay good dividends, and may hold up well in the months to come. This is why it's important to diversify and rebalance the portfolio periodically. Which means shifting some capital (not all) from the recent winners to the cyclical losers!
Notice that despite volatility, there is only a one 12 month period where stock returns were actually negative. 2022 was a historical perfect storm for stock and bond prices.
U.S. Presidential election years tend to be kind to stocks.
All of the above logic, along with the plethora of conflicting predictions of financial economic pundits, remind us that it's impossible to tell what the stock market is going to do in the short run. This reinforces the case for the "No Idea Approach to Investing," reflected in the "Rigden Model Portfolio," as guides to establishing the best investment strategy for you.