#187 – 2024 Outlook: A Whole New World

Wes Moss [00:02:45]:
Wes don’t know exactly what that’s going to be, but it’s never going back in the bottle. Inflation is not going back in the bottle anytime soon. I think of some of the developments like the semiglutide drugs from Eli Lilly, Ozempic, Wagovi. We’ve heard of these. They were newer in 2023 at least. The adoption, they’re game changing. These are massive leaves forward in the world of healthcare. We’ve seen massive leaps forward in work for combating Alzheimer’s from some of the big drug companies that have been working on this for decades.

Wes Moss [00:03:19]:
And we saw huge breakthroughs in 2023. Those genies have escaped the bottle. They are not going back in. They have changed the landscape of the world. And for the most part, I think they’re changing the world and the economy for the better. But higher interest rates, that genie is out of the bottle and we’re going to have to live with that in the new year. And then I think of inflation maybe in this way, and it’s maybe because I watch too many Marvel and superhero movies because I have four younger boys. And fortunately I get to skip things like, I guess it’s the frozen’s of the world.

Wes Moss [00:03:56]:
But I’m seeing every marvel or every monster movie. And I think of in my mind, maybe it’s a Game of Thrones reference, maybe it is a Godzilla reference. But inflation has roamed the earth like Godzilla for the better part of modern economic history. It is something that we’ve always been scared of perennially to either combat against, protect ourselves against, avoid that Godzilla like monster has roamed the earth ever since we’ve been investing, ever since we started investing. And that’s again, let’s call at least the last hundred years so we know about that threat. What’s so interesting about it is just like in some of these superhero or monster movies, that Beast was frozen in the arctic tundra. It was frozen in a glacier, and the world kind of forgot about it. We went about a decade, a little longer than a decade, and nobody was really all that worried about inflation.

Wes Moss [00:04:55]:
Where did it go? Oh, yeah, inflation 1%. What’s the big deal? Then we know what happened. The pandemic came. There was a tidal wave of money supply, fresh money, and it melted that massive iceberg where the Godzilla inflation monster lay rest for over a decade. It’s now flying the earth again, swim the oceans, flying the earth, and it’s something we have to protect ourselves against here in this whole new world. The genie’s out of the bottle, by the way, that is an Aladdin reference. Whole new world came from the movie Aladdin, which is where genie from the bottle came. And it all comes together in the 2024 theme for the retire sooner podcast.

Wes Moss [00:05:38]:
Now, think of it this way. There’s also a chart that I think for investors need to drive your thinking over the next. Call it five years, ten years, and it’s a simple if you were to pull up an inflation chart and go back to call it around the financial crisis, go back to 2007, and then we see this economic recovery, and then we look at what inflation did all the way until right before the pandemic. Twelve years worth of inflation, that only amounted to 18%. So twelve years. And all we got was 18% of inflation over that entire period of time. So just a little more than 1% per year, almost unnoticeable. Again, frozen in the glacier.

Wes Moss [00:06:19]:
Then the pandemic hit, and since 2020, we’ve had 20% inflation in just three years. So think of just that visual ramp up this long period of time, almost a flatline, a little bit of inflation, then, wham, 20% inflation in just three years. Inflation, it’s here to stay. It’s roaming the earth. And it is target number one for us as investors. It is the thing that we need to defeat over time, to be able to protect our purchasing power, to be able to protect ourselves against wilting dollars, to be able to maintain the standard of living that we want to maintain over the course of our retirement years. So inflation is target number one. And the ideas for this year, the six ideas I’m about to share, many of them harken back to being able to defeat inflation.

Wes Moss [00:07:09]:
And we start with the US economy. There is no place that economists get forecasting more wrong than what happens with the economy. I think back in the beginning of last year, ten out of eleven or eleven out of ten economists predict that we’re going to have a recession. I went back and looked at headlines from the end of 2022 head into 2023. This one’s from December 2022. From Bloomberg, it was showing the recession odds as a consensus of us, major us economists starting the year last year, 70% odds that we would hit recession. Here’s another gloomy and very wrong headline. October 2022 forecast for the United States.

Wes Moss [00:07:52]:
This is Bloomberg. Economics sees near certainty for downturn that will start in the coming year. Headline is forecast for us recession within year hits 100%. But that recession never happened. It didn’t even come close. In fact, when we do the final tabulation, which still won’t be for a little while, 2023 will have grown around two and a half percent. So calls for recession of minus one to 2%. No, it was completely the inverse or the opposite of that.

Wes Moss [00:08:24]:
Plus two and a half percent. And one of the quarters from last year was up over 5% in GDP growth. That’s not just a little bit of growth, that’s a massive surge in growth. I think the only person that maybe got this right was Louis CK. Louis CK talks about, he’s actually a comedian, not an economist. He’s famous for saying, everything is amazing right now and nobody’s happy. This is a very recent article. Think about 2023.

Wes Moss [00:08:49]:
We had a stock market up over 20%. We had a bond market that finally did well for the first time in many years, and an unemployment rate that stayed under 4% for the entire year, and quite frankly, the year before that as well. Those are all big, important chunks of how the economy did. Yet Americans are still unhappy with the economy. This is a New York Times Sienna poll conducted, call it two months ago. In November, 81% of Americans described the condition of the economy as either poor or fair. 81%. Only 19% of people thought it was either good or excellent.

Wes Moss [00:09:27]:
Awful lot going well. Nobody’s happy. Guess what? There’s really one reason for this. And if you go through and look at there’s a Gallup poll that asks what is the most important financial problem facing your family today? There’s two dozen reasons people can pick from. Then they rank them. Social Security. The employment situation. Is it too much debt? Is it the state of the economy? What would you say the biggest problem is? And even though there’s 24 different responses, it really boils down to one thing.

Wes Moss [00:09:58]:
Inflation. It’s inflation. Number one on the list, the high cost of living and inflation. Number two on the list, the high cost of owning and renting a home. Next on the list, the high cost of debt. The high cost of energy, the high cost of health care. The list goes on. Every answer is because of inflation.

Wes Moss [00:10:16]:
It is, again, the reason Americans are uneasy, the reason Americans are unhappy. And guess what? It’s target number one for all of us to defeat in our retire sooner journey. Oh, and by the way, maybe Louis CK was the only guy that was right about the economy in 2023. So it’s really hard to make predictions. However, it’s very conceivable that we have a pretty okay, economy, or a pretty good economy in the year 2024. Now, again, there’s lots of calls for recession, just like there were last year. Yes, there’s plenty of economic headwinds. There always are.

Wes Moss [00:10:50]:
Yes, we’ve seen the excess savings that was accumulated in the pandemic that’s gotten whittled down for the most part. So bank accounts are a little less flush. Yes, there’s no secret that we’ve had for many years, and it continues to get worse. That’s the ballooning national debt. It’s $34 trillion. And because rates are higher, the cost to service that debt has continued to expand. And there’s also no secret that we’ve got a commercial real estate issue in the United States. As working from home dramatically changed the commercial real estate game.

Wes Moss [00:11:24]:
People just plain don’t work in the office as much as they used to before 2020. Those are all variables that could weigh down the economy. Those could all throw us into a negative GDP situation, create fear. Commercial real estate, then we have a banking issue, then banks lend even less than they’re lending today. Consumers clam up, they stop spending. And sure, we could go into a negative GDP situation, and guess what? That would likely be a recession. However, I think it’s very difficult to slow down the army of american productivity. The army of american productivity is the unstoppable inertia that is the US labor force.

Wes Moss [00:12:08]:
You got about 166,000,000 folks out there in that labor force. That’s a big army. And that group continues to drive innovation and drive economic progress 24 hours a day, 365 days a year. And that drives by belief that over the long run, us companies are the beneficiary of that army of productivity, which gives all of us an opportunity to invest in those companies. That collective, that group gets to harness all the work that happens every single second of the day, all the innovation that happens every single second of the day to push things further, that this tank, this freight train of productivity that creeps higher and higher and keeps getting more and more efficient with more innovation over time. It’s not a straight line. We have better years than we fall back. But here we are with an economy that has over 96% employment, over 96% of people that want to work are working.

Wes Moss [00:13:09]:
That means pockets are full, people have money coming in, and guess what? Inflation. That is a problem in some respects. We’re also seeing in wages. So people’s wages have been going up, and now that the rate of inflation has actually come down in the United States, we’re seeing wage growth higher than inflation, meaning that for the first time in a very long time, people are getting real raises. A real raise is that if inflation is five and you get a raise of four, you’re really still 1% worse off. A real raise is that if inflation is five and you get a 7% raise, it’s a 2% real raise. And we’re very likely to see that here in 2024. Put that all together, maybe we don’t have a two and a half percent robust us economy, but can we grow in the one to 2% range? Absolutely.

Wes Moss [00:13:58]:
And I think that lands us in what I would consider a Goldilocks economy. It’s not too hot, it’s not too cold. It’s somewhere in between. And that’s a decent economic environment that we could see in 2024. Now, number two, that also means that we could see a broadening out of the equity markets. So again, another theme. If we’re talking about stocks, one of the best arrows in our quiver to combat said Godzilla like inflation that roams the earth. We know that in 2023, stock returns were extremely narrow.

Wes Moss [00:14:35]:
There was a select group called the Magnificent Seven, the mag seven. It was big companies like Apple and Microsoft and Alphabet meta, et cetera, that the world sooner to because of AI. The initial AI boom. As recently as November of 2023, 100% of the entire positive return in the SP 500 was because of those companies. That means that the other 493 were sitting on the bench doing almost nothing. Fortunately, that did start to broaden out, and we saw a lot more participation from the average size company. Just the large cap, not the ultra mega caps, which ultimately did get to a pretty decent low double digit return by the end of 2023. In fact, if you look at the S and P 500 versus the S and P 500 equal weight index, remember, S and P 500 is cap weighted.

Wes Moss [00:15:32]:
So you can have a couple gigantic trillion dollar companies that have huge influence on how the index itself does. And a mere $10 billion company could be up 100% for the year, but have almost no impact on the upside of the S and P 500. But we can also look at what’s called the S and P 500 equal weighted index, where all 500 companies have the same share or the same weight. 2023, it was the biggest divergence between those two s and P 500 and SP 500 equal weight that we’ve seen in 20 years. And the equal weighted index. Think the average company with the average weight was trounced by about 15%. Very much left behind, very much out of balance and when you see something that’s that out of balance, the most that we’ve seen in 20 years, it does stand a reason. We get a retire, we get a reversion of the mean, and we could see the average or more median sized company participate in markets as well.

Wes Moss [00:16:32]:
A broadening out of equity market returns. Anytime you see a company, a group of companies that gets largely shunned by investors and has an attractive valuation. By the way, the mag seven trades at a whopping 33 times earnings. The average stock a more reasonable 18 times. Anytime you get a group that gets forgotten about or shunned at some point over the course of market history, investors start to pay attention to that group, hey, that’s the group that’s on sale. We could see that play out in 2024. We could also see a renewed appetite for finding dividend paying stocks. 2023 was an interesting year where, because interest rates shot up so much for the first time in ten or 15 years, really the highest level in 22 years.

Wes Moss [00:17:21]:
For the Fed funds rate, fixed income or bonds or cds were kind of the new game in town. All of a sudden, at four and 5%, money flowed into that area, and it was an environment that easily kind of left all the two and three and 4% dividend paying stock behind. The world has digested these higher interest rates. We’ve had them now for more than a year. Even though there was a shock to the system, and the Fed still is at the highest Fed funds rate we’ve seen in 22 years, the economy has, to some extent, digested and gotten used to these higher rates. And because inflation, we think at least the rate is moderating a little bit. It means the Fed could ultimately lower rates at least one, two, maybe three times this coming year, even without having to go into a recession. They’ve said for a long time, we’re going to raise rates, we’re going to leave them there for a while to cool things down, I.

Wes Moss [00:18:14]:
E. Inflation, at least the rate of inflation, then we can calm down. So we could see, as we’ve emerged from this new environment and we’re in a whole new world, people are used to higher interest rates, we’re used to inflation. You could see a push from investors finding those dividend yielders that have become relatively unpopular. Maybe there’s a light that shines on them again. Thinking about retirement in 2024? Well, you’re not alone, and I’ve got just the thing to help guide you on your journey. What the happiest retirees know. My most recent book that shares the ten habits of the happiest retirees meant to help you land at a place where work becomes optional for a limited time.

Wes Moss [00:18:58]:
Get 25% off@westmossbooks.com. Simply use the promo code. Our treat, all one word at checkout. That’s westmossbooks.com number three on the list. Bonds. Bonds are back. Bonds had a rough run for a couple of years, and finally in 2023, because of the end of the year, eked out a pretty decent rate of return. But in the world of bonds, ious, fixed investing, again, this is not equity investing.

Wes Moss [00:19:32]:
It’s kind of the polar end of the spectrum. It’s not my favorite way to hedge inflation, but it’s certainly an area for investors to have dry powder and to use as diversification. And by the way, we’re going to talk about remembering the importance of a balanced portfolio and how that can stocks and bonds can work together in just a minute. But as for this category, that did wonderfully well for the better part of the last 40 years, had a rough couple of last years because in the bond world, there’s a saying that goes like this, yield is destiny. Meaning that historically, 86% of total return we get from bonds or fixed income is dictated by their starting interest rate. That low rates typically not a great outlook for total returns. Higher rates here we are, 22 year high, greatly improves the overall return outlook for fixed income or bonds. And if you’re an income investor, over the last, again, 30 and 40 years, bonds have been a really useful part of the portfolio, not just for the income, but for that stabilization role within an investment portfolio.

Wes Moss [00:20:42]:
And that’s because of their countercyclicality with stocks. This relationship didn’t work all that well when interest rates hit the zero bound for a while. Now that they’re back to more normal levels, bonds should go back to providing that cushion for investors when stocks get hit. Next up on the list, number four. Put the last two together. We talked about stocks broadening out. We talked about how bonds are in a better position they’ve been in for a while. And again, of course, there’s no guarantee on returns on any of these categories, but we’re talking about where they’re positioned moving into the new year.

Wes Moss [00:21:19]:
There’s something very important about putting all of these different pieces together. It’s called asset allocation. It’s beyond just diversification. And Harry Markowitz was an economist that won the Nobel Prize behind the whole concept of having a balanced portfolio, a 60% stock and a 40% 30% bond and 10% cash portfolio. And ever since he won the Nobel Prize around this, Wall street has loved it. They’ve dismissed it. Now, they may love it again, but headlines about the, quote, balanced portfolio, they’re really talking about rates of return in any given year. And they ignore the whole concept’s fundamental purpose, which is a diversification of different asset classes, using a combination of the multiple areas in the investment landscape to just reduce your volatility and smooth out your glide path to reach your long term goals.

Wes Moss [00:22:16]:
So it’s now used the term 60 40. It’s really used as a proxy for diversification. And it doesn’t have to be exactly 60% stocks and 40% bonds. It could be 80% stocks and 20% bonds, 70% and 30. It’s really along this entire spectrum. The concept, for the most part, provided we’re not at either end of the spectrum, anywhere in the middle, is giving you some of that countercyclicality, some of that asset allocation that is meant to find you a maximum rate of return at a given amount of risk. Let’s go through the following illustration, and we’re using the 4% rule here, 4% rule, which is take out. We’re going to start with a million dollars, 4%, it’s $40,000.

Wes Moss [00:23:00]:
And do that for 20 years, increased for inflation. So 40,000, if inflation goes up by 10%, it’s automatically 44,000 is the new higher watermark. So if we go back over the last 20 years, so three through 2023, if we just invested in treasuries and each year we were using the one year treasury rate, million dollars, we would have taken out just shy of 1.2 million, which is 40,000 over 20 years, bumped up every year for inflation. You’re starting to almost completely run out of money. In that scenario, the million dollars now is less than 250,000. But if you use the balance 60% stock, 40% bond portfolio, again, you withdrew the same amount of money just shy of 1.2 million. You’re left with over $1.4 million at the end of that 20 year period. So even though we saw multiple stock bear markets during that period of time, the great financial crisis, the pandemic, there were other bear markets, and we saw about a two, almost three year stretch.

Wes Moss [00:24:04]:
That was the worst for the bond side of that portfolio we’ve seen in almost 100 years. The balance of those two asset classes together still trounced investing in a highly protective way, not using asset allocation, but just choosing the most, quote, conservative or safest asset class, year after year after year, the balance is our friend. And remembering that balance, whatever it might be for you, and it’s going to be different, maybe for it will be different for almost everyone in some respect. But the balance itself is the key. Put that all together, and all of these themes, number five, bring us to. No matter what economic environment we’re in, the inflation monster has awakened. And as investors, we need to remember that that is target number one. So, number five, here on our outlook of ideas and themes, hedging against inflation remains critical.

Wes Moss [00:25:02]:
Now. Again, as challenging as stocks have been, and real estate, as an example, has been, and value has been, or dividend paying stocks in 2023, has been. If I look over the past three years, and we know inflation has been around 20%, that’s where we started this whole conversation. A broad variety of stocks, the Russell 1000 growth index, the Russell 1000 Value Index, the S and P 500, energy pipeline companies as a sector reits, believe it or not, real estate investment trusts as a group have largely kept up with or way outpaced inflation over the past three years. So pretty simply investing in assets that have the ability to inflate along with inflation. Hard to find other areas that work a whole lot better than that. Yes, physical real estate, I would say, is definitely one of those categories that can do that. Owning businesses, private businesses, absolutely something that can do that.

Wes Moss [00:25:58]:
But the equity markets that invest all over the United States and do business all over the world, and categories from real estate to energy to energy transportation to just the larger sectors of dividend stocks versus growth stocks, if you give it enough time, it’s hard for those arrows not to work with that. Why would we think inflation continues to circle the earth? Well, there’s a couple of reasons why we don’t think it’s going back into the glacier. Number one is deglobalization. The IMF calls this globalization, and it really started about a decade ago. If you look back over the last 40 years, or the better part of call it the 40 years prior to that, the trend in the United States and really for countries around the world has been to just continue to seek out cheaper and cheaper countries to do business in. We can go make our goods over here because they’re less expensive, then we can import them back in. So we’re constantly exporting, finding a lower cost provider, and that was great for keeping inflation somewhat low. But if you look at the share of exports around the world, the United States and other countries, it’s really flatlined over the past ten years.

Wes Moss [00:27:15]:
And then that trend accelerated even more. In a post Covid world, not only did globalization slow down, it got very unpopular. Now we want to make everything here in the United States because we can’t continue to rely on other economies that may have totally different policies around things we can’t control. And by the way, it takes a month for a ship to get from there to here. We don’t have time for that. Let’s start making things here in the United States. Maybe it costs more, but at least we can get it. That’s choosing accessibility.

Wes Moss [00:27:46]:
It’s choosing availability to some extent over cost. So globalization is inflationary, not deflationary. The next piece of this is a massive commodity underinvestment. It’s maybe hard to remember, but back in 2014, the price of oil got crushed. It went down by over 50%, 2014 through 2015, and it really, really hurt a lot of the energy business, put a lot of companies out of business. Ever since then, oil companies, companies. Couple that with the environmental movements and the climate movements that, quote, oil is bad, oil companies have been really hesitant to double down on their capital expenditures. Hey, let’s go find more oil.

Wes Moss [00:28:33]:
Let’s go spend more money to pull more oil out of the ground. Same thing goes with other commodities. Copper is the same way. We’ve seen if you look at the oil industry, you look at the copper industry, one’s fuel, one’s a metal. Capital expenditures have come down dramatically in both those categories since 2014. Now here we are with an even bigger world, more population, more gdp. And despite all the Teslas we see driving around, we still need more fossil fuel than we ever have again. Underinvestment in commodities means a low supply, means higher prices.

Wes Moss [00:29:10]:
Pretty simple. Inflationary tailwinds, or called inflationary headwinds. Then, of course, something that is not a secret at all, and that is that we hit $34 trillion in government debt. And because interest rates are a lot higher, the cost of that debt is going up. That makes it really tough for monetary policies. The money spigot coming out of Washington to not get narrower. It’s been full blown, it’s been gushing for years. And whether you’re a Republican or a Democrat, both sides of the aisle look at that number, and they’re staggering.

Wes Moss [00:29:50]:
Everyone knows that Washington needs to pump the brakes. Now, whether they do that or not anytime soon is another question. But slowing down of that excess tidal wave of money that thawed out the glacier, that released the inflation monster, that tidal wave of money that is very inflationary, that’s got to slow down. Speaking of Washington, we have no idea. I have no idea what’s going to happen in 2024. Is it going to be Biden versus Trump? Who knows? As of the early in the year, it seems pretty clear that that’s the case. But we have no idea what’s going to happen. What we do know is that it’s a reelection year, meaning that the guy that’s currently in office is running again.

Wes Moss [00:30:30]:
And historically, the market has done pretty well in that situation. The S and P 500 hasn’t declined in a reelection year since 1944. The past eleven presidential reelection years have been up. And if we look at just overall performance for reelection years versus open election years, there’s also a huge difference between those two. If you go back to 1960, the SP 500 average gain is 13% higher in presidential reelection years compared to open elections. Why could that be? Well, I think it’s pretty simple. The guy in office wants to keep his job, so they’ll do everything they can. And again, this is Republicans or Democrats will do everything they can, all the tools at their disposal to make sure the economy isn’t that bad.

Wes Moss [00:31:20]:
Headed into the end of the year, November reelection. Here are a couple economic headlines that have already hit the wire that are little levers. Some of these are bigger than others that could come out of Washington that would to some extent goose the economy. One record U. S. Oil production pushing prices down. Remember we used the strategic petroleum reserve? That was for emergencies. Well, the emergency was that gas prices were really high.

Wes Moss [00:31:49]:
That’s a headline from axios. This is from the Washington Post. Federal infrastructure. Clean energy spending is powering the economy, lifting GDP from Bloomberg. China and the US could strive for peaceful coexistence. I think Washington knows that, at least in the short term, maybe less tariffs would goose economic trade back and forth to China, trying to offset some of that deglobalization. And I feel like I read one of these almost every day. There’s always some new twist in student loan forgiveness.

Wes Moss [00:32:19]:
Here’s why 2024. This from CNBC. Here’s why 2024 could be the year student loan borrowers finally get their forgiveness again. Forgive a couple more billion dollars in student loans. Those payments don’t have to go to debt, they end up in spending. They goose the economy. All levers that Washington can pull to try to cheer up Americans, quite frankly, couldn’t really be less depressed about the economy. According to almost any poll you read, put it all together.

Wes Moss [00:32:49]:
And I think 2024, despite all the naysayers like we saw in 2023, and we see in 2024 could be a pretty good year. Yes, it’s a whole new world. Artificial intelligence, higher interest rates, a new era of inflation, massive advances in medicine, but the tried and true practice of investing in a balanced way, in a balanced mix of dynamic, dividend paying companies, along with the steadiness of fixed income, continues to be a path that I believe makes a lot of sense for a lot of investors. You take dynamic companies in the United States, durable business models, all powered by the army of american productivity. And oh, by the way, many of those took a backseat in 2023. We could see some value unleashed in the coming year. Bond yields again, yield is destiny in the bond world, the highest we’ve seen in 22 years on the federal funds rate. At least.

Wes Moss [00:33:51]:
Put those two super important inflation weapons together, and I think that could be the weapon or defense we need. And we all seek to combat inflation for the long haul. And that’s something that every happy retiree needs to do.

Mallory Boggs [00:34:08]:
Hey y’all. This is Mallory with the retire sooner team. Please be sure to rate and subscribe to this podcast and share it with a friend. If you have any questions, you can find us@westmoss.com that’s wesmoss.com. You can also follow us on Instagram and YouTube. You’ll find us under the Handle Retire Sooner podcast. And now for our show’s disclosure. This information is provided to you as a resource for informational purposes only and is not to be viewed as investment advice or recommendations.

Mallory Boggs [00:34:36]:
Investing involves risk, including the possible loss of principal. There is no guaranteed offer that investment return, yield, or performance will be achieved. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions for stocks paying dividends. Dividends are not guaranteed and can increase, decrease, or be eliminated without notice. Fixed income securities involve interest rate, credit inflation and reinvestment risks and possible loss of principal. As interest rates rise, the value of fixed income securities falls. Past performance is not indicative of future results. When considering any investment vehicle, this information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors.

Mallory Boggs [00:35:20]:
Investment decisions should not be based solely on information contained here. This information is not intended to and should not form a primary basis for any investment decision that you may make. Always consult your own legal, tax or investment advisor before making any investment tax, estate or financial planning considerations or decisions. The information contained here is strictly an opinion and it is not known whether the strategies will be successful. The views and opinions expressed are for educational purposes only as of the date of production and may change without notice at any time based on numerous factors such as market and other conditions.