Heading into the last few weeks of 2023, the S&P 500 seems likely to finish the year with a gain, although it’s still below its December 2021 peak.
Investors were understandably skittish in 2023, as equity markets rallied back from 2022 losses until August. After three months of declines, trading to the upside resumed in November and early December.
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Can that uptrend continue into the new year? According to a Dec. 4 blog post from J.P. Morgan, investors have reasons to be optimistic.
J.P. Morgan’s global investment strategists believe that while the U.S. economy could see slow growth in the first half of 2024, the economy will likely avoid a recession. “Higher bond yields and reasonable stock valuations mean that forward-looking returns seem more promising than they have been in more than a decade,” they wrote.
They added that other themes for 2024 include artificial intelligence (AI) and government incentives for politically important industries including national security, renewable energy, semiconductors, infrastructure and supply chain.
For investors getting their portfolios organized for 2024, here are some of the best investment categories to research and watch for opportunities:
— Growth stock funds.
— Value stock funds.
— Small-cap stock funds.
— Large-cap stock funds.
— International stock funds.
— Dividend stock funds.
— Long-term bond funds.
— Short-term bond funds.
— High-yield savings accounts.
— Commodities and alternatives.
Growth Stock Funds
Growth stocks are fueled by rapid revenue and earnings expansion. Technology stocks are typically among the ranks of fast growers, as are communications services and consumer discretionary stocks.
Those sectors all did well in 2023, posting strong rebounds.
“Growth stock funds invest in companies expected to grow at an above-average rate compared to other firms and can be a good choice for investors seeking higher returns and willing to accept higher risk,” said Taylor Kovar, CEO and founder of Kovar Wealth Management in Lufkin, Texas.
Growth stocks can be reliable investments for those comfortable with those higher risk levels. Among CFRA Research analysts’ top growth stocks that have reported steady annual revenue growth over the past three years are Exxon Mobil Corp. (ticker: XOM), Salesforce Inc. (CRM) and Adobe Inc. (ADBE), for example.
Top exchange-traded funds, or ETFs, in the growth category are Schwab U.S. Large-Cap Growth ETF (SCHG) and SPDR Portfolio S&P 500 Growth ETF (SPYG) — both of which charge low expense ratios of 0.04%.
Value Stock Funds
Value investing is the strategy of finding undervalued stocks, often overlooked by the market, with strong fundamentals and the potential for future growth. These stocks typically trade at lower prices relative to their intrinsic value, based on fundamentals such as earnings and revenue performance.
The thought process behind value investing is that these undervalued stocks will gain in price as the market recognizes their true worth.
Traditional value sectors such as utilities, health care and consumer staples were among the 2023 laggards. Vanguard Value ETF (VTV), which tracks U.S. large-cap value stocks, lagged behind the wider large-cap market.
Value stocks may live up to their reputation in 2024, rallying as investors identify stocks that appear to be trading at bargain prices.
It’s a common phenomenon to see this year’s lagging stocks rebound next year due to improvements in market conditions, company fundamentals or shifts in investor sentiment.
Small-Cap Stock Funds
The performance of small-cap stocks compared with large caps varies depending on economic factors and market sentiment.
In 2023, the small-cap Russell 2000 Index underperformed compared with large-cap indexes. Much as with value stocks, that may signal that smaller stocks could post rallies in 2024, as investors scoop up companies trading at attractive valuations.
“Small caps really didn’t participate in 2023’s rally and we believe offer an interesting opportunity for 2024,” said Brian Katz, chief investment officer at The Colony Group in Boston, in an email.
Katz added that investors looking beyond the mega-cap stocks that outperformed in 2023 may respond to small caps’ more compelling valuations. Two popular funds in this category are iShares Russell 2000 ETF (IWM) and Vanguard Small-Cap ETF (VB).
Large-Cap Stock Funds
Large-cap techs were the heroes of 2023, as the “Magnificent 7” group of Amazon.com Inc. (AMZN), Apple Inc. (AAPL), Google parent Alphabet Inc. (GOOG, GOOGL), Meta Platforms Inc. (META), Microsoft Corp. (MSFT), Nvidia Corp. (NVDA) and Tesla Inc. (TSLA) led the market higher.
Many of those stocks rallied on the potential for AI to drive productivity gains. However, the broad asset class of large-cap stocks includes mature dividend payers that can also deliver reliable returns.
“Large-cap stock funds invest in large, established companies and are generally considered more stable than small-cap funds,” says Kovar. “They can be a cornerstone for a diversified portfolio, offering steady growth with moderate risk.”
As large dividend payers offer returns even in a down market, and large-cap growth stocks can rally in a more favorable environment, large-cap stocks can be valuable holdings in all conditions. For example, large-cap tech fund iShares U.S. Technology ETF (IYW) has been one of the hottest investments of 2023, soaring roughly 60% with a reasonable 0.4% expense ratio.
International Stock Funds
International stocks detracted from the returns of diversified portfolios in recent years, as U.S. stocks led.
The iShares MSCI EAFE Index tracks large- and mid-cap developed market equities outside the U.S. and Canada. That index has notched a positive return so far in 2023, but it hasn’t kept up with the S&P 500.
“I’d suggest reducing your exposure to international equities for the next 18 months to two years, as interest rates will place pressure on global currencies,” says Avis Berg, chief investment officer at Berg Capital in Houston.
“During this time frame, the domestic market in the U.S. is expected to perform exceptionally well and regain momentum, especially benefiting growth stocks in the large-cap category,” Berg adds.
If you’re interested in international stock funds for diversification in your portfolio, however, Vanguard Total International Stock Index Fund Admiral Shares (VTIAX) and Fidelity International Index Fund (FSPSX) are leaders in this category.
Dividend Stock Funds
Dividend stocks provide a steady income stream that not only offers stability during market downturns, but it can also help offset losses.
In the U.S., dividend stocks are typically those of established companies with strong financials, indicating stability and reliability. JPMorgan Chase & Co. (JPM) and AbbVie Inc. (ABBV) fit the bill here.
Investors can truly maximize the power of dividends through reinvestment, which leverages the power of compounding over time.
This consistent income, regardless of market trends, makes sense for long-term investors seeking a reliable income source. This holds true in any market cycle, in any year. Low-fee, longtime leaders Vanguard Dividend Appreciation ETF (VIG) and Schwab U.S. Dividend Equity ETF (SCHD) are good options.
Long-Term Bond Funds
Vanguard Long-Term Bond Fund (BLV) tracks the long-term, investment-grade U.S. bond market. That ETF has managed a year-to-date return of about 3.6% as of Dec. 6, thanks to strong rallies in November and early December.
Long-term bond funds have both advantages and disadvantages for investors.
On the plus side, they offer higher yields compared to short-term or intermediate-term bonds, potentially providing greater income for investors. In a falling-interest-rate environment, these funds can show healthy gains.
However, the extended maturities in long-term bonds expose investors to interest rate risk; when rates rise, bond prices fall, hurting the fund’s value. Market volatility can also affect long-term bond funds more significantly than their shorter-term counterparts.
UBS report “What’s Next for Bonds in 2024?” found that Federal Reserve rate cuts and easing inflation will likely result in yields declining as quality bonds rally in 2024. Yields on longer-dated debt hit multiyear highs in October.
Bonds typically perform well when the Federal Reserve pauses rate hikes, although that may not change the “higher for longer” thesis regarding interest rates. That will make high-quality, long-term bonds a more attractive proposition compared with cash.
A solid option in this category is Schwab Long-Term U.S. Treasury ETF (SCHQ), or if you want exposure to bonds of varying maturities, iShares Core U.S. Aggregate Bond ETF (AGG) is a popular choice.
Short-Term Bond Funds
Short-term bonds also present a unique set of advantages and disadvantages for investors.
An advantage is that these bonds generally have lower interest rate risk compared with their longer-term counterparts. Their shorter maturities make them less susceptible to price fluctuations caused by interest rate changes.
However, the trade-off is a lower yield than longer-term bonds, potentially resulting in reduced income for investors. Also, short-term bonds may be more affected by inflation, as their returns may not keep pace with rising prices.
Recently, bond investors have been gravitating toward intermediate-term instruments. If inflation cools and rates remain stable or even decrease, shorter-maturity yields are not as attractive as those with more duration.
If you’re set on short-term bonds, consider Schwab Short-Term U.S. Treasury ETF (SCHO). Otherwise, a middle-ground option is Schwab Intermediate-Term U.S. Treasury ETF (SCHR).
High-Yield Savings Accounts
A high-yield savings account is more attractive when interest rates are high, offering investors a competitive yield on their cash.
When compared to traditional savings accounts, high-yield options provide a better return on savings, maximizing interest earnings. This makes them a preferred choice during periods of elevated interest rates.
With a growing number of Wall Street analysts predicting rate cuts in 2024, investors should carefully watch the rates in their high-yield accounts, says Derek Amey, managing partner and co-chief investment officer at StrategicPoint Investment Advisors in Providence, Rhode Island.
“Savers benefited from the rate hikes because the interest they are currently earning is highly correlated with the front end of the yield curve,” Amey says.
At the moment, two high-yield savings accounts worth looking into are UFB Direct’s Secure Savings account, paying 5.25%, and Synchrony Bank High Yield Savings, paying 4.75% as of Dec. 7 with no minimum balance and no monthly fees.
Commodities and Alternatives
Commodities and other alternative investments, such as real estate, can serve as diversification tools within an investment portfolio.
Commodities such as gold, silver, oil and gas, or agricultural products can provide a hedge against inflation and economic uncertainties. Additionally, commodities often have a low correlation with equities, potentially offering a buffer during market downturns.
But heading into 2024, commodities are underperforming stocks. There may be some green shoots on the horizon, though.
“Commodities are at secular lows relative to stocks. Capital discipline has returned to the energy sector, and underinvestment and green energy policies have helped kick-start commodity price movement,” says Wes Moss, managing partner and chief investment strategist at Capital Investment Advisors in Atlanta.
For example, Moss says, over the past three years the price of oil went from less than $50 per barrel to more than $70. In the past two years, gold went from $1,800 per ounce to more than $2,000.
Moss noted that trends such as near-shoring and re-shoring, as well as wars involving energy-producing nations, are likely to result in energy costs remaining high.
“For certain investors, energy, commodities and real assets may deserve a place in a long-term, well-diversified portfolio,” he says.
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10 Best Investments for 2024 originally appeared on usnews.com
