Andrew Opdyke is back with us to get his insight on the broad economy. He’s been on our show multiple times, and he’s returned with his 2023 end-of-year economic update that everyone should listen to at least once.
Whether you’re trying to secure your retirement or in the middle of retirement planning, it’s always important to keep a pulse on the market.
October-November 2023 Economic Update
October was an interesting month due to the conflict between Israel and Palestine, and inflation remaining stubbornly high. Economic data came in stronger than anticipated, but there were still some concerns.
November 1st, the Fed’s meeting was a sigh of relief for many when they announced that maybe they’re “done” with trying to tame inflation. Perhaps rate hikes may remain on pause for now.
Rate easing may be ahead in 2024, which is what a lot of economists are hoping will occur.
However, as anyone who follows the market knows, just two weeks prior to these reports, there were just too many concerns that inflation may last a little longer. We just don’t have all the data yet to say if 2024 will see interest rates fall, stay the same, or even go a tad bit higher. Right now, as of mid-November, the New Year looks promising.
We’ll need to watch the data to better understand the ebbs and flows of the market right now.
Concerns of Investors Outside of the Magnificent 7 Stocks in the Market
When looking at the S&P 500, it has performed well this year when you include the stocks that are the “magnificent 7.” What are these stocks? They’re high performers that carry the market and include big names:
If you remove these seven stocks from the market, you’ll notice that the market is down in an equal weight market. The percentage of companies beating the index is at a 20- or 30-year low. Equal weight provides a better picture of what’s transpiring in the market, which would show most stocks are either flat or slightly down.
How much are people paying for the top 10 companies in the index? Many investors are paying a multiple of 25 to 30 for these ten stocks and a multiple of 17 for others.
What does this all mean? The top stocks need to continue performing well for the overall market to recover. Andrew would like to see a broader market rise, in which dozens of stocks are lifting the market, and believes that it will take some time to materialize.
Will the Economy Land or Take Off?
Soft landing. Hard landing. A lot of terms are thrown around for the economy and how it will end up after the pandemic and the high level of inflation that we’ve seen. Some economists are of the mindset that the economy won’t land but will take off.
However, Andrew believes that we’re likely to see a soft landing.
What we saw in the third quarter is that companies have excess inventory, which is due to a slowdown in production after COVID. Companies purchased a lot of inventory due to supply chain issues and are likely to:
- Slow spending over the next 3 – 9 months
- Avoid some growth initiatives due to high-interest rates
Will we hit a recession? Who knows? A recession has been six months away for 18 months now. Companies are buying less, building is slowing and if we do go into a recession, there’s a good chance that it will be very shallow.
We need to get back to sustainable interest rates without outside influence and stimulus.
Entering into 2024, we should start to learn more about the strength of the markets and economy without any outside influence building it up.
Building an Investment Portfolio to be Recession-proof
If we enter a recession, will interest rates still remain high? Look at companies that have sustainable cash flow, because even Apple must pay the high interest rates of today when they take out a loan and they add tens of billions in free cash flow quarterly.
Investors will want to dive into balance sheets and see which companies can fund their own projects without loans.
You should also look at:
- Smaller companies with healthy cash flow
- Exposure to small- medium- and large-cap stocks
- Potentially add international stocks
Recalibrating your portfolio to deal with the unknowns and still have exposure to potentially risky technology.
Hamas and Israel Conflict
The United States has been sending money to Ukraine and is now funneling money to Israel. Ongoing events like these play into how the economy will look in the future.
The main risk of this new conflict is in the energy markets.
If Iran or others enter the conflict, it can lead to higher energy markets and a further rise in inflation. Economic repercussions of the Israel and Hamas war are likely to be a lot less than even Ukraine and Russia.
Trade conflicts and fracturing are occurring, and the US is doing a good job by determining who our strong trade partners are and reallocating our investments to these countries. We’re importing less from China and are trading more with:
We have shuffled back and pulled away from China, pushing them from the first to the third trade partner that we have.
AI and the Hype Around It
Cryptocurrency was a major trend in past years, followed by blockchain. Now, we’re seeing a lot of people harp on the idea of AI. We’re at a point where we were with the Internet first coming about, where companies knew that the landscape of the way we work was changing.
What does AI mean for us?
The environment and world are changing. Some professions may become obsolete, and some new jobs may be created. If you look at the top 10 companies in 1999 and today, only two remain: Microsoft and Exxon.
AI may be won by the biggest companies, but if history repeats itself, we’ll see some companies born out of AI that may change the world. We may see the next Facebook or Meta created, and it may be a company everyone is overlooking.
What are you Most Worried About?
Geopolitical issues that are popping up, and more are likely to be added, are a major risk to the economy right now. China is likely to see a more difficult path in the next 10 – 20 years. We’re also entering an election year, and the negative side of the election can cause market fluctuations.
Escalation of Russia and Poland, Iran entering the Israel and Hamas war or China invading Taiwan can all effect the economy.
What are You Most Excited About?
AI excites Andrew, and he believes that while the technology is likely to change the world, in the next 24 – 36 months, we may see some major changes thanks to AI. Humanity is “fighting the fight,” with more people being literate and doing some amazing things.
We’re seeing how dementia has been in decline in the last decade, and as a whole, we have more people than ever trying to solve problems that have plagued the world around us.
Andrew is unbelievably excited to see how human potential is being unleashed.
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