2024: The Year Of Living Dangerously

Listen above or on the go via Apple Podcasts and Spotify

Rob Isbitts on 12 market themes of 2023 and why 2024 is set to be the year of living dangerously as we have a lot of markets at the crossroads. This is an abridged conversation from a recent Investing Experts podcast.

Transcript

Rob Isbitts: One of the things I did was, I put together — well, I wouldn’t call it the 12 days of Christmas. But what I did is, I put together a list from 1 to 12, and each of these is a number that has some significance at least as of a couple of weeks ago for the year 2023.

One is the number of trillions of dollars in consumer credit card debt. It’s actually 1.08 trillion. Is it going to matter next year? Depends who you ask. And that’s kind of a theme of the rest of this conversation today.

Two, two heartbreaking war zones, obviously, Ukraine and the other one Israel-Hamas. Hasn’t really affected markets other than suddenly, but let’s see what happens beyond that. Hopefully nothing.

Three, three straight poor years for bond prices. Now bonds have rallied very sharply in just the last few weeks. But generally speaking, it’s been a rough three year period for bonds, and frankly for a lot of stocks as well.

Four, there were four more Fed rate hikes following the seven we had in 2022.

Five, 5% treasury bill interest rates. And by the way, one article concept I have coming up, do people even realize that T-bills out to one year are still well over 5% as we record this. So, with all the other drop, I mean that’s telling me something. I don’t know what it is yet. I just know it’s not normal.

And if you know anything about a yield curve inversion, where longer rates are supposed to be higher than shorter rates, that part is not following along just yet.

My best guess is that it is the continued concerns over the U.S. government being able to fund its debts in the short term because so much of that debt, that 30 — well, I mean, it’s been a couple of days, so it’s probably grown by another half a trillion. So I may be off. But we’re somewhere in the 32, 33 trillion in debt and I just don’t think that goes away without some weird things happening beyond what we’ve already seen.

In the meantime, I think what that’s telling you is that’s what the government has to offer in order to attract buyers. We’ve had some awful, awful, I mean, like practically failed bond auctions, not in the short term stuff, a little bit longer.

And look, we’ve seen interest rates across the board go shooting higher, started last year and then continued in 2023 here. Now they’re shooting down. I just don’t think that this is over. And I’m not so sure that inflation is over for this cycle, but we’ll probably get into that a little bit. So that’s one through five.

So, I’m an ETF geek. So, I follow this and I think it has implications for all investors. Just like the S&P and the NASDAQ are very crowded at the top, same with the ETF business, the top six issuers of ETFs hold more than 85% of assets. I’m talking U.S. ETFs.

And so it’s this same type of dominance. And as you know, and maybe as listeners know from following Sungarden Investment Publishing on Seeking Alpha we cover ETFs broadly and market strategy, but we have a special kinship with the overlook, the undercover, the under the radar ETFs. And I have a feeling that in the coming years, I think in part because we’re going to give it a lot more attention, that I think that may even out a little bit.

Seven, well, that one’s easy. The Magnificent Seven stocks. That’s what the industry has called them. They have dominated stock performance, really in a way we haven’t seen since the late 90s. Let’s hope that it doesn’t turn out the way it did after 1999 because those of us who are old enough to remember and manage money through it, which I did, 2000, 2001, 2002, all down years for the S&P and all down years for the NASDAQ. Each year, the loss was more than 30%. Yes, kids that’s possible. Because when you lose 33% you have $67 left, you can still lose 33% of that, and so on and so on. It never goes away.

Eight. Eight is for mortgage rates. They’re down now, but they did hit 8%. And so that was kind of the other side of the coin. If you’re a saver, 5% T-bills are awesome. If you’re somebody that is trying to buy a new home, well, this is why the housing market is frozen this year and why homebuilders building new stuff are having a little better time in part because they’re working out massive incentives.

Nine. Again, just an ETF point. ETFs are $9 trillion now globally. And for every dollar that leaves a mutual fund, it’s probably going into an ETF. I say that’s sort of off the cuff, but generally speaking, if you look at the numbers, it looks a lot like that.

So I really do believe that that ETFs are probably the best complement that a stock picking or stock and bond type investor has ever had. I know we won’t cover that too much here because we’re sticking mostly to macro. But I do believe that and $9 trillion can’t be wrong. Isn’t that what they say? And projections are it’s going to grow to 20, 25, 30 over the decade.

So the last three. Ten. 10-year bond, specifically the volatility, it was just off the charts this year and it made stars out of some previously pedestrian bond ETFs. Bonds are acting a lot more like stocks. (NASDAQ:TLT) is an ETF that became kind of the new poster child for, hey, I like bonds and rates are going down. So I want to make a lot of money.

And in reality, TLT covers 20 to 30-year treasuries, but the 10-year is the benchmark. It’s what so many things are tied to. And that type of volatility again says to me, okay, there’s something different going on here. And we haven’t really seen the lag effect of 11 Fed rate hikes.

So the other thing to keep in mind before I get to the last two on this list is that, the lag effects, okay, the consumer at least, well definitely in Europe, I would say almost certainly in Asia and clearly in the U.S. there’s so much income inequality that you’ve got people investing in the stock market, they’re doing fine, and locking in 5% T-bill rates all year. But then you’ve got a massive part of the population that isn’t participating in this and they’re already feeling the lag effects of all those rate hikes.

And I’ll throw this out there just in case we can come back to it sometime next year, and say, oh, you know, Rob, Rob called this. Because I’m not afraid to be wrong because, you get used to it when you do this for 37 years. Here’s a sneaking suspicion I have. Okay. The government needs to keep refunding and better it does it at lower rates than higher rates.

The second thing is, it may be that the Fed knows something that maybe the market doesn’t know yet about liquidity going through 2024, because fundamentals aside, if markets dry up and there’s limited liquidity, Janet Yellen, Treasury Secretary just said this a few months ago that the liquidity conditions for the treasury market were pretty awful.

Well, if the, sort of bastion of high quality, low risk investing, the U.S. treasury market is getting more and more illiquid or should I say less liquid, that is a problem and it has ripple effects.

So the last two, 11 and 12, and this is as of a couple of weeks ago, it’s changed with the recent rally, but as of early December, of the 30 stocks in the Dow Jones industrial average, 11 were down. 11. And I still believe the Dow is the best index out there because it doesn’t have the heavy weighting, sort of top heaviness that the others do.

And then finally, 12. 12 is the number of Fed board members who talk too much. That’s my opinion. But I remember back when the Fed just did its job quietly, financial advisors, investors, we didn’t have to constantly mark our calendars for when somebody was scheduled to give like a mundane talk at an economics club.

So to me that kind of sets up for why 2024 is the year of living dangerously because we have a lot of markets at the crossroads.