By Lew Altfest, CFA, CFP®, CPA, PFS, Ph.D., Chief Executive Officer and

Andrew Altfest, CFP®, MBA, President Altfest Personal Wealth Management

 

When a new year kicks off, it’s beneficial to evaluate the previous year’s milestones before moving forward. Here are the economic and investment market developments that we at Altfest Personal Wealth Management would like to highlight at the beginning of 2024 to help you think about the best moves for your finances:

 

• Economic growth for 2023 was strong, despite continued Fed tightening to rein in fast-rising prices. Consumers kept spending and inflation declined somewhat.
• However, a recession in 2024 can’t be ruled out. We say there’s less than a 50% chance of one, but it’s something to be mindful of. An inverted yield curve – when short-term interest rates are higher than long-term rates – is historically a recessionary indicator, and this pattern still exists for the bond market in the new year.
• We have a more optimistic view about the economy than we did at this time last year. Modest-to-moderate growth for 2024 is most likely, our firm believes.
• International securities have on balance underperformed U.S. ones for more than 15 years, but their outlook right now is attractive.
• Asia is the most interesting part of the international financial markets. It is clear to us that, at least for the next several years, most of the region’s companies will post above-average growth rates for revenue and profit. Our portfolios reflect this viewpoint.
• In Asia, we are favorable on investments in China, Japan and India for this year.

With those views and predictions in mind, we’d like to share some of Altfest’s thinking about smart investing in early 2024.

 

Under Our Microscope

We are giving the most attention to holdings in bonds, banks, real estate and other alternative investments, health care and emerging markets.

Bonds are delivering historically high rates of return, and we like both the safe, U.S. government-backed bonds that we own and less plain-vanilla but still relatively conservative mortgage-backed bonds.

When 2023 opened, there wasn’t clarity on whether we were heading into a recession. So, at that time we de-emphasized cyclical stocks, or those that move in lockstep with the economy, such as banks. And we also used different hedged positions that allowed for a lot of upsides in market movement but capped the exact amount of upside while also protecting us on the downside.

After the banking crisis last March that peaked with the failure of some fairly large institutions, we bought the bonds of regional banks that we felt were being unfairly punished by the markets, companies that posed minimal risk and had strong balance sheets. They didn’t have a lot of exposure to commercial real estate, which was one of the concerns out there for banks. In general, the yields from these types of bonds were very high.

Also, at the beginning of last year, we saw a good buying opportunity in communications stocks, and we took a position in a communications exchange-traded fund (ETF) that did very well in 2023, partly because it had some meaningful positions in Facebook/Meta and Google/Alphabet, which led the way.

As mentioned, inflation remains high and still has the potential to depress stock prices and cause a “hard landing” for the economy. To recognize this, we favor some less traditional, or alternative, investments that provide good inflation hedges.

Some alternative investments traditionally do well in a higher inflationary period; one example of this is infrastructure investments. We look for companies that can increase their pricing in line with inflation. Some are highly regulated, and inflation allows them to actually pass on price increases to their customers.

Other alternative investments allow us to manage risk, for instance through the active alternative strategy we offer clients. It is a flexible and dynamic strategy that can, among other things, take positions that profit when parts of the financial markets decline. The strategy has behaved differently than a traditional stock and bond portfolio and therefore been a good diversifier.

We primarily think about countering recession risk through our bond management. We’ve increased the maturities of the bonds that we own for this reason. So, the yields we’re able to obtain today are favorable compared with what they’ve been historically.

Our view is that these yields aren’t going to remain that high forever, and they also serve to manage risk. If the economy is weak or if we do have a hard landing, people flock to safety and buy more conservative bonds, increasing their prices.

 

Where to Look in the Stock Market

Everyone is talking about the “Magnificent Seven” big-technology stocks (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla) that turbo-charged the entire S&P 500 index higher last year. But there are parts of the stock market that are much more reasonably priced and that have good long-term growth prospects. Some we suggest are in the health care sector and, again, real estate stocks. Real estate stocks at present are more attractively priced than similar private real estate investments. Looking beyond commercial real estate into other parts of the publicly traded real estate market turns up some good opportunities, too.

Why don’t we look more closely at the equities opportunities outside the U.S. that we pointed out earlier? On average, among the stocks in our portfolios, the split is now 60% U.S. stocks and 40% international stocks. That’s a change for Altfest that puts more weight in shares from emerging markets, but it reflects our view that international stocks offer some opportunities now. As a value-focused firm, asset pricing is critical to us. International stocks normally sell at a discount to U.S. stocks of about 16% historically, but today they’re available at a 34% discount.

There is also a good argument to be made for including a meaningful allocation in international markets just to have a portfolio that is managed in a diversified manner.

 

Sizing Up Investments in China

Last, when considering international investing, it’s impossible not to think about how to approach China. If you look at today’s pricing of Chinese stocks versus U.S. stocks, on average, they’re selling at a 45% discount. Historically, they’ve sold at a 22% discount, so that’s significantly cheaper than in the recent.

It’s true that there are some things going on in the Chinese economy that aren’t so rosy: higher levels of unemployment than we have, a slower-than-expected reopening of the economy after COVID, damped consumer confidence and a property sector that needs time to recover. But the most dire potential scenario, in our opinion, already has been priced into Chinese stocks. We think there are good opportunities in the pricing of Chinese stocks and that the returns on these investments might materialize even faster, should the Chinese government become more supportive of its economy.

In addition, there are bonds in China tied to their property sector that are trading at 3 cents to 5 cents on the dollar. We think that through restructuring, these bonds could be worth between 15 cents to 30 cents on the dollar later and there’s already precedent for that. So that’s another asset class to watch in China.

 

Find Out More

At Altfest, in our consultation process, we work to get to know who you are, and what financial concerns are most important to you. What is it that you’re trying to accomplish as far as your financial and life planning goals? Using these ideas we’ve shared for early 2024, what changes in portfolio direction or corrections can we help you make in the new year?

Once we develop a good understanding of your situation, we’ll put together a road map to help you get to where you want to go.

If you’re not yet an Altfest client, please book some time for a complimentary consultation.

 

 

Investment advisory services provided by Altfest Personal Wealth Management (“APWM”). All written content on this site is for information purposes only. Opinions expressed herein are solely those of APWM, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation. All investing involves risk, including the potential for loss of principal. There is no guarantee that any investment plan or strategy will be successful.