Looking at the financial trends, it’s crucial not to focus only on immediate changes but also to understand broader patterns. In simple terms, we’re hopeful that stocks might increase in value, even though the economy could face some challenges that might lead to less aggressive monetary policies. Meanwhile, investors seem more confident, and the market is quite stable. Like in 2023, the stock market sometimes goes against extreme sentiments. Even so, we feel that the ‘bull market’ (a term used when prices are expected to rise) in stocks is undervalued, meaning there’s still room for growth. This makes us cautiously optimistic about U.S. financial markets for the coming year.

This year’s presidential election is expected to bring a lot of drama, with potential implications for various sectors of the U.S. economy. If President Trump wins in 2024, certain sectors could benefit. The Energy sector, for example, might experience a boost due to Trump’s preference for traditional energy sources and a rollback of environmental regulations. The Financial sector could see higher profitability with potential deregulation. Additionally, the Defense sector could grow, aligning with Trump’s advocacy for increased military spending. On the other hand, if President Biden secures victory, certain sectors stand to gain. Given the current administration’s commitment to renewable energy and climate change mitigation, the Clean Energy sector could witness significant growth. The Healthcare sector may prosper with Biden’s focus on expanding affordable healthcare and strengthening aspects of the Affordable Care Act. Infrastructure could also benefit from Biden’s emphasis on substantial investments to stimulate the economy and create jobs. Lastly, increased regulation of internet companies could potentially benefit the Technology sector by creating a more level playing field. Regardless of the election outcome, we believe that high-quality U.S. companies will continue to offer stability and strong long-term returns. Our investment strategy focuses on dividend growers with solid financial health and competitive advantages, aiming to navigate potential market volatility and consistently deliver results for our clients.

Our strategy for the coming year will focus on investing in high-quality stocks and companies increasing their dividend. High-quality companies that have strong financial health and good management skills. These characteristics have typically led to better performance than the broader market during economic slowdown. Yes, these high-quality companies are more expensive now than they were at the beginning of 2023, but they are still below their highest-ever levels. Plus, these companies’ profitability, as measured by ‘Return on Equity’ (ROE), reached almost 39%, a near-record high, in the second half of 2023. So, even with the broad market’s lower ROE (25%) and slowing earnings trends, we believe investing in these quality companies is still a good option.

Dividend Growers’ Quality Traits Offset Volatility

Equity volatility trended lower in 2023 despite elevated rates’ implied volatility and episodic volatility driven by the regional bank crisis, debt ceiling negotiation, and the Israel-Hamas war. Year to date, there were only 44 days when the VIX Index was above 20, compared to 236 days for 2022 and 93 days for 2021.19  As monetary tightening enters its third year and the effects of pandemic-era fiscal and monetary stimulus diminish, equity implied volatility is likely to move higher.

Dividend growers’ quality traits may help lower the impact of volatility when pursuing upside in equities.

Companies that have historically increased their dividends for years have shown their ability to balance returning capital to shareholders and reinvesting capital for future earnings growth. Achieving this balance over a long period of time requires financial strength and disciplined capital management. That usually translates into high-quality traits, such as lower financial leverage and more stable earnings than the broader market and higher-yielding companies.20

Thanks to their track record of returning capital to shareholders and maintaining financial stability, on average, dividend growers have outperformed low dividend payers, high dividend payers, and the broad market when equity volatility jumped double digits for the month. Even when volatility increased to a lesser extent, dividend growers still outperformed low dividend payers by a large Companies that consistently increase dividends, showcasing robust financial health and systematic capital management, are likely to offer stability for our clients These are the stocks of companies that possess a robust financial foundation, excellent management, and competitive advantages in their respective industries. even when volatility increases in the financial markets, dividend growers outperform low dividend payers by a large margin.

Betting on Asset Allocation in 2024

Asset allocation, the practice of spreading investments across various asset classes like stocks, bonds, and cash to balance risk and return, witnessed a revival after abysmal returns the preceding year. This was largely due to a more stable economic outlook and a desire for investors to diversify their portfolios in response to unpredictable market events in previous years. By spreading investments across various asset types, investors can protect themselves from the volatility of a single asset class, potentially increasing overall returns. This balanced investment approach is expected to continue to be profitable in 2024 and beyond, as investors navigate through the complexities of the global economy.

Investing in bonds continues to be a smart strategy for 2024. Despite the potential economic slowdown, bonds, particularly U.S. Treasuries, have historically shown resilience during such periods. They provide a sense of security to investors due to their relatively low volatility and the fact they offer regular income through interest payments. As interest rates are anticipated to decrease, bond prices are expected to rise, yielding capital gains for bondholders. This inverse relationship between bond prices and interest rates can be a key advantage for investors in a falling rate environment. Moreover, in the face of mounting uncertainties, bonds offer a safe haven, helping to diversify portfolios and reduce overall investment risk. For these reasons, we believe bonds will remain an attractive investment option in 2024.

Global economic growth may be sluggish next year, with stock prices potentially driven by the price-to-earnings ratio rather than earnings. European investor sentiment surveys are at decade lows, and international stock valuations are bracing for a challenging 2024. Mega-cap U.S. stocks have overshadowed the outperformance of international stocks, but the average international stock continues to outpace the average U.S. stock. Emerging market stocks’ performance will likely revolve around China and India, representing over 40% of the MSCI EM Index. Investing in China may be improving, but growth is unlikely to surprise on the upside due to the property market overhang, while India’s growth momentum could propel it to the top three global economies if it capitalizes on transformative initiatives, though its stocks are already expensive.

Another area of potential growth in 2024 is emerging markets (EM). Investors have neglected mainly emerging markets in recent years, but we believe that may change as economic conditions improve and opportunities arise. In a world of low-interest rates, emerging markets offer higher yields and the potential for capital appreciation, making them an attractive investment opportunity.

As we chart the course for 2024, our investment approach will continue to be guided by prudence, vigilance, and strategic insight. We remain committed to delivering the best possible investment outcomes for our clients, by staying ahead of the ever-changing market landscape and identifying opportunities for long-term growth. We believe that a diversified portfolio, with a mix of dividend growers, bonds, international equities, and strategic asset allocation will help investors achieve their financial goals in 2024 and beyond. With this approach, we are confident in navigating through potential market volatility and delivering solid returns for our clients.