In 2023, the majority of predictions missed the mark as most anticipated a
recession at the start of the year. Highly paid strategists, once again, found themselves
off course. Moving toward the end of the year, a shift occurred among these
prognosticators towards more optimistic projections. Market mavens now believe that
the Fed has orchestrated a soft landing, paving the way for new market highs in 2024.
This optimism is fueled by expectations of higher earnings and lower interest rates.
However, skepticism arises as some question the predictive capabilities of Wall Street,
while others view the perpetual bullishness with cynicism. The significance lies in the fact
that, from a valuation perspective, Wall Street is relying on the bullish scenario to
materialize, potentially already reflected in the S&P 500’s elevated multiple of 19.5X
forward earnings. This leaves little room for error, emphasizing the need for lower rates
and double-digit earnings growth by mid-year to avoid a significant correction
While the overall market remains expensive, opportunities persist within the value
space, which has underperformed for over a decade, with 2022 being the exception.
Value is emerging in some large-cap stocks, emerging markets, and small-cap securities.
However, the potential for value to regain the lead is seen on a relative basis, meaning it
may outperform in a down market. Growth continues to represent the best opportunity
for total return, with technology remaining the sweet spot. Portfolio managers grapple
with the dilemma of chasing tech stocks higher or taking risks with underperforming
value names. At Dover, challenges facing investors have not gone unnoticed. Historical
allocation quandaries, such as underperformance in high multiples and preserving cash,
are familiar struggles. Fortunately, opportunities still exist with individual names,
especially in healthcare and defense, which underperformed last year and are now
considered attractive. Some tech names are selling at reasonable Price to Earnings
growth levels. Within fixed income, short-term bonds still offer over 5%, alternative
credit yields are interesting, and adding duration is deemed necessary given the
expected drop in rates.
The prospect of achieving lower interest rates is linked to the possibility of a
recession, inevitably leading to diminished earnings. This presents a delicate balancing
act, where the pursuit of lower rates is intertwined with the potential adverse impact of
an economic downturn on corporate profitability.
Inflation, still 1% above the target, introduces a nuanced challenge. The
persistence and stickiness of inflation at this level raise concerns about its trajectory,
adding complexity to the economic landscape. A careful evaluation of potential
inflationary pressures is required, considering their implications for market dynamics.
Despite challenges, positive indicators exist. Employment remains robust, and the
consumer exhibits strength, contributing to a stable foundation for consumer spending
and bolstering the overall resilience of the economy.
However, cracks in the economic foundation are apparent. The ongoing inversion
of the yield curve and the escalation of consumer debt pose potential risks. The inverted
yield curve historically signals economic downturns, necessitating vigilance and a
comprehensive understanding of underlying factors.
Navigating this intricate interplay demands a nuanced and adaptive approach.
We are carefully weighing positive elements against challenges, considering potential
recessions, inflation dynamics, and emerging vulnerabilities. Our thorough analysis of
these complexities will be crucial for making informed investment decisions in an
environment marked by both opportunities and risks. Please call or email us with any
questions or concerns.
Ned AbbeNed Abbe & Jess Ellington
Co-Chief Investment Officers
Rick Hinchberger & Bruce Faurot
Portfolio Managers
Important Information:
The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed
forward looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from
those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.
The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be
considered a solicitation to buy or an offer to sell a security. It does not consider any investor’s particular investment objectives, strategies, tax status or investment horizon. You
should consult your attorney or tax advisor.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy,
reliability, or completeness of, nor liability for, decisions based on such information and it should not be relied on as such. Risk associated with equity investing include stock
