With the unemployment rate hitting 4%, up from 3.4% in early 2023, the Fed could be encouraged to start cutting rates, they said.
“However, the ZIRP (zero interest rate policy) era is over; and while the bond market may have adjusted to this reality, the equity market may not have just yet. Active management is likely to have a better year in 2024,” the investment strategists said.
The strategists said they expect the inverse relationship between Treasury bonds and stock prices, however, to continue into 2024.
In fact, the only drop of at least 10% in U.S. stocks in 2023—by definition a correction—was triggered when the 10-year Treasury yield spiked from below 4% to 5%, Sonders and Gordon noted.
The recovery that has followed was buoyed by a decline in yields, with the 10-year yield moving back down to below 4.5% as of close of market Friday.
“Looking at next year, we believe the best backdrop for the U.S. equity market would not necessarily be another significant plunge in yields—particularly if triggered by a significant weakening in economic growth—but instead less volatility and more stability in yields,” the investment strategists said.
Heading into 2024, Sonders and Gordon warned investors not to be complacent when it comes to rebalancing.
“Specifically, investors who have sector and asset classes exposures within portfolios that are now stretched both to the upside (such as the Magnificent 7 of the S&P 500) and downside (such as smaller cap stocks), periodic rebalancing is prudent in the interest of ‘adding low and trimming high’ and staying in gear with the market's eventual mean reversions,” Sonders and Gordon concluded.