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  • Tessa MacDonald

The BIG Report: January 2024

The BIG Report: January 2023

Updates and Information for our valued clients

Hello and Happy New Year from all of us here at B.I.G.! 2023 is officially in the books and what a great year it was for the market and our clients. We were fortunate to “listen” to what the market technicals were saying despite a lot of fear and worry early last year. As such, we got fully invested in March of 2023 and were ableto fully realize last year’s gains.

As we move into 2024, we are cautiously optimistic believing the market will likely have a tumultuous yet positive year. The charts and recent accomplishments of the market suggest we will go higher especially if we soon clear the all time high of two years ago but there are a few fundamental challenges that still face us. 

First, recession risk is still looming. Yet, the labor market continues to be very strong which makes it hard to envision a significant one. Everyone that wants a job can get a job and most everyone that has a job is getting raises. Credit card and car loan delinquencies have been climbing indicating increasing weakness for the U.S. consumer which accounts for 70% of the U.S. economy. That said, these delinquencies have risen to a point of “normalcy” not what would be considered “recessionary”. The current economic backdrop and some of the work done by leading technicians make me think a recession is more likely in 2025/2026 rather than 2024.

Secondly, it is a presidential election year. And although that should fall into the “positive” column as politicians will work hard to avoid a recession during an election year, this cycle is shaping up to be quite a circus. Historically, the U.S. Presidency has very little impact on the direction of the market. However, the election process itself could certainly cause some market moving headlines.

Third, geopolitical risk is still quite prevalent with the Russia/Ukraine war, the Israel/Hamas conflict and China’s thirst for Taiwan. If the wars stay contained to the current parties and China behaves regarding Taiwan, these issues should not have much of an impact on markets. If the Israel/Hamas conflict broadens, it could send oil prices higher becoming a headwind for the market. A China/Taiwan conflict would be a tremendous initial shock to markets but we think that is unlikely as China witnessed the blowback against Russia with its incursion into Ukraine. We would expect China to try and reunify with Tawain via political and other inadvertent channels before seriously considering military options. Russia’s reactions to Ukraine and how they react to our involvement will remain a wild card as well.

Fourth, inflation. Outside of reactions to corporate earnings, I think the inflation story and the Federal Reserve’s reaction to it could be the biggest cause of volatility for 2024. The markets are pricing in six Fed rate cuts beginning in March of this year. I do not believe that’s going to happen. The Federal Reserve officials are terrified of having a repeat of the “Great Inflation” of 1965 to 1982. We had a significant spike of inflation into 1975. The Fed raised rates and inflation dropped in 1975 at which time the Fed eased up too soon. This led to inflation not just coming back but coming back with a vengeance! It led to hyperinflation and double-digit interest rates. Mortgages were 12% and car loans over 20%, it was a bad time. Our Fed is very afraid of making the same mistake. Inflation moved down rapidly from 9.1% in 2022 to 3.1% in 2023 but the Fed wants to see 2% and the move from 3% to 2% is proving to be incredibly difficult. Wages have continued to be on the rise and this keeps pressure on inflation. All of this taken into consideration, I think the Fed will be much slower and more measured in reducing rates than the market currently expects. And if there is a surprise uptick in inflation, that could be quite a shock to market expectations. 

Finally, there’s U.S. fiscal policy risk. I don’t think this is an issue for 2024 but it is quickly becoming a major problem for America. I’ve had many clients express concern over America’s solvency over the last 25 years and I’ve always expressed that it's important to look at our national debt in “relative” terms. Don’t just look at the headline number and say “It’s the highest in history and therefore we’re doomed”, look at it as it relates to Gross Domestic Product (GDP). After all, most of our retired clients paid more for their most recent automobile than they did their first home but they’re also making a lot more money. So it’s not the raw dollar figure we want to focus on but how it relates to the bigger picture. For the national debt, look at “Debt compared to the total U.S. Economy or GDP” The worst shape we’ve ever been in was World War II when we hit 120% debt to GDP. We just hit 122% debt to GDP but there’s a HUGE difference this time. The last time we saw this level of debt, Social Security had just started and only covered the primary worker. Neither Medicare, NASA, the CIA, Department of Education or Homeland Security (just to name a few) existed at the time. There were no student loan programs, goose poop studies in Montana or taxpayer funded research on the social habits of primates. You see where this is going right?

Unlike the last time we hit 120% debt to GDP, we now have 212 TRILLION dollars of unfunded liabilities on top of it! That’s $630,000 per U.S. citizen of bills to pay in addition to the 34 trillion dollars of U.S. debt. We are not in the fiscally lean and mean position we were in post World War II. No one seeking office seems to be taking this issue seriously. President Trump signed a 1 trillion spending bill PRE COVID and President Biden signed a 3 trillion spending bill POST COVID. Neither were COVID related. The government has RECORD revenues coming into the Treasury yet it is disappearing like water through a sieve. Perspective... you could wrap the equator of the earth 3,300 times with one trillion dollars! We owe 34 trillion and have 212 trillion in bills coming due. 

I believe we still have some time. As witnessed during COVID and the 2022 bear market, the world still sees the U.S. as a safe haven during times of economic stress. However, if our safe haven status changes, it could be devastating. This is not hyperbole, it’s mathematics. We had the opportunity to refinance our debt out to 20 years for 1% to 2% during the last two administrations. They didn’t do it. Now, 80% of our debt is coming due within the next 5 years at rates of 4% to 5% instead of 1%. Our interest payments alone are on a fast track to becoming America’s largest annual expense!!! This is a problem, one that you need to keep in mind as we enter the 2024 election cycle. One you need to keep in mind when you rub elbows with members of Congress or the Senate as I know some of you do from time to time.

In closing, we wish you a GREAT 2024! We will be monitoring these issues closely and reacting accordingly to work through what we expect to be a volatile yet positive year. As always, we appreciate your trust and confidence. Be on the lookout for information on the B.I.G. phone app due out in the coming weeks! Happy New Year!

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