The month of December was good for the markets with the three major indices all riding an 8-week winning streak to end the year. The NASDAQ finished the year positive 44.6% while the S&P 500 was up 24.6% for the year and the Dow finished the year positive 13.2%.
Money Market funds became a favorite place for Americans to stash cash this year, thanks to their historic yields. The annualized seven-day yield on the Crane 100 list of the 100 largest taxable money funds is currently 5.19%. It was 4.05% on Dec. 31, 2022, and 0.17% on Dec. 31, 2021, according to Crane Data, a firm that tracks money markets.
Inflows ramped up as well. An estimated $950 billion has gone into money market funds so far this year, bringing the total net assets to $5.87 trillion as of Dec. 20, according to the Investment Company Institute.
The Federal Reserve has indicated three rate cuts for 2024, which means the yields in short-term assets like money market funds and online savings accounts will follow suit. While it’s unclear when those cuts may start, Fed Funds futures pricing data suggests about a 76% probability that rates will decrease by 25 basis points in March, according to the CME FedWatch Tool.
“Even if the Fed is going to ease, it is going to be very measured, very controlled,” said Shelly Antoniewicz, deputy chief economist at the Investment Company Institute. “Short-term yields may be a little lower but will remain very attractive.”
Peter Crane, founder of Crane Data, expects yields to go down at most to 4% by the end of 2024.
“With lower inflation rates, that is not exactly a bad deal,” he said. He anticipates retail money will continue to flow into the funds, even though some may drift back to the stock and bond markets.
If money market funds drift back into the stock market, we’d expect the stock market to benefit from the influx and continue to perform positively. This may bode well for dividend-paying stocks as investors who favor money markets tend to enjoy the income generated by dividends.
What are the stock market prognosticators saying? Here are a few samples:
Brian Wesbury, First Trust: “The past few years have been the most difficult time to forecast in our careers. The US economy has never gone through COVID lockdowns before, plus a reopening, along with such massive peacetime fiscal and monetary stimulus. We understand many think we can do all this with little, or no, significant impact on the economy. We don’t believe this conventional wisdom. 2024 will be a tough year. Our capitalized profits model reflects a year-end price target of 4500 for the S&P 500, which is slightly lower than the 4777 where it trades today.”
Liz Ann Sonders, Charles Schwab: “Our outlook does provide some runway to the upside to equities, but possibly with the necessity of some economic pain nearer-term, in the interest of less-tight monetary policy. Heading into 2024, another short-term concern is around investor complacency, witnessed in attitudinal sentiment indicators showing elevated optimism amid extremely low volatility. As was the case in 2023, short-term market swings often move contrary to extremes of sentiment.”
Our outlook for the new year is “2024”: 2% growth, 0 recessions, 2% inflation and 4% unemployment. A soft landing remains in reach, particularly as disinflation looks set to continue and the Federal Reserve now appears satisfied with its progress. We do not put year-end target pricing on the market.
At Morgan Stanley in the U.S., growth should slow to 1.9% year over year in 2024 and 1.4% in 2025, down from an estimated 2.4% in 2023, as higher interest rates and tighter monetary policy work their way through the financial system.
Among notable Wall Street firms, Yardeni Research holds the most bullish price target, with an anticipated gain of over 14%. On the downside, JPMorgan expects the S&P 500 to fall roughly 11% in 2024. The consensus price target appears to be the 5,100 level, which would signify modest gains for equities next year.
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