10 Best Investments for 2024 | Investing

Key Takeaways:

  • Growth stocks may see a robust 2024 on the strength of trends such as AI disruption and decarbonization.
  • Small-cap stocks are trading at attractive valuations as analysts see the possibility of a rebound in 2024.
  • The time could be right for locking in rates on long-term, high-yield bonds.
  • Commodities may be poised for gains as demand outpaces supply.

Advisor’s Corner

The S&P 500 started the year slowly after a bang-up performance in 2023. Sector performance has been mixed. Growth stalwarts technology and communication services are leading the pack three weeks into the year, and traditional defensives like utilities and consumer staples are in the red.

“The biggest factor expected to influence stock returns in 2024 is the expectation of falling interest rates,” says Robert Johnson, CEO of New York-based Economic Index Associates.

Johnson cites the CME Group’s FedWatch tool, which shows market participants’ consensus views of Federal Reserve interest rate moves. That consensus shows that in December 2024, the target fed funds rate is expected to be a full 150 basis points lower than it is today.

“This bodes well for both bond prices and equity prices,” Johnson says. “Interest rates are critical inputs to the valuation process, and influence the value of stocks and bonds.”

In a Jan. 17 research report, “Three Investing Trends for 2024 and Beyond,” Morgan Stanley analyst Michael Zezas wrote that artificial intelligence will continue to be a disruptor, and decarbonization will offer investment opportunities.

He also cited increased longevity; as life expectancies increase due to medical and technological developments, not outliving one’s money becomes even more crucial for retirement savers.

With all that in mind, here’s a look at some major asset classes as the year gets underway:

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.

“In early 2024, growth stocks, particularly in the tech sector, may continue to be volatile due to market uncertainties and interest rate fluctuations,” says Taylor Kovar, CEO of Kovar Wealth Management in Lufkin, Texas.

However, he adds, growth stocks offer the potential for significant long-term gains, especially for companies with strong fundamentals and innovative products or services.

As an example, says Patrick Kennedy, founding partner of AllSource Investment Management in Hartford, Connecticut, “e-commerce growth has exploded since COVID, which has created massive demand for logistics centers to handle the supply-chain needs for the modern business.”

New tech-based logistics companies have sprung up to address this need. Those firms aren’t as glamorous as large-cap social media or consumer-facing techs, but they could offer opportunities for savvy investors.

Other growth stocks that analysts expect to continue to do well over the next 12 months include Amazon.com Inc. (ticker: AMZN) and Exxon Mobil Corp. (XOM).

Value stocks are those overlooked by the market, but which have 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.

Value stocks lagged in 2023 as growth stocks exploded, largely thanks to the promise of tech companies set to gain from artificial intelligence.

So far in 2024, traditional value sectors such as utilities and consumer staples continue to lag.

Vanguard Value ETF (VTV), an exchange-traded fund that tracks U.S. large-cap value stocks, posted a small gain in January. However, it’s underperforming the tech-dominated Vanguard S&P 500 ETF (VOO). Lower interest rates often benefit tech stocks, so a repeat of 2023’s big tech rally is not out of the question.

Some value stocks on analysts’ radar now include PayPal Holdings Inc. (PYPL), International Business Machines Corp. (IBM) and Hormel Foods Corp. (HRL).

Small-cap stocks are trading at attractive valuations after years of underperformance. But when a particular asset class has been a laggard for an extended time, investors often swoop in to nab shares at a bargain.

The iShares Russell 2000 ETF (IWM), which tracks domestic small companies, outperformed the iShares Core S&P 500 ETF (IVV), a large blend fund, in the fourth quarter. Small-cap stocks are trailing the S&P 500 in January, however.

Goldman Sachs is betting that small caps are poised for a rebound. The company’s asset management unit recently launched the Goldman Sachs Small Cap Core Equity ETF (GSC), with holdings at a weighted average market capitalization of $5.1 billion.

In a November video, “The Case for a Small-Cap Rebound,” Goldman Sachs’ Greg Tuorto acknowledged that “small caps have not been a fun place to be,” as investors fretted about the effects of high rates on small companies. In addition, investors perceived that innovations such as anti-obesity drugs and AI would benefit larger companies.

But that sentiment may be misplaced, Tuorto says, as small companies may be well positioned to capitalize on transformative technologies. “We think that small caps are a great place to access disruptive innovation because these companies have significantly more leverage to the mega-trends that are out there today,” he said in the video.

Bitfarms Ltd. (BITF) and Applied Optoelectronics Inc. (AAOI) could be promising stocks in this category for 2024, but do your own research on individual stocks before committing to opportunities.

Large-cap techs were the clear winners in 2023, extending a two-decade winning streak.

However, market breadth has been fairly narrow, as the well-known group of “Magnificent 7” stocks, consisting of Amazon, 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. Collectively, those stocks advanced 107% in 2023, versus the overall S&P 500 return of 24%.

In January, while large caps continued to lead small caps and mid-caps, there’s been some rotation within the ranks of S&P 500 top performers.

Nvidia is still among the top gainers in the new year, but otherwise, a new batch of technology stocks, Juniper Networks Inc. (JNPR), Palo Alto Networks Inc. (PANW), Advanced Micro Devices Inc. (AMD) and Arista Networks Inc. (ANET) are the index leaders.

In addition to the promise of growth from AI and cloud computing, large-cap stocks also pay dividends more often than smaller companies. That’s another factor that tends to mitigate large-cap volatility.

As U.S. large caps dominated the global equity markets in the past decade, plenty of investors have wondered why they should even bother diversifying to foreign shores.

Even proponents of broad asset class diversification have seen, repeatedly, that non-U.S. stocks have been a drag on performance.

But could 2024 be the year that things finally turn around?

“U.S. stocks have been strong in recent years, but there are reasons to be optimistic about non-U.S. stocks in 2024,” says Krishna Mohanraj, portfolio manager at Diamond Hill Capital Management in Columbus, Ohio.

“Attractive valuations and the ability to invest in companies that could perform well regardless of the direction of the global economy has us excited for the new year,” he adds.

Mohanraj cites the example of Japanese stocks, saying he’s observed a renewed focus on improving company and shareholder returns.

The Vanguard Total International Stock ETF (VXUS) tracks an index of non-U.S. stocks from both developed and emerging markets. That ETF posted a gain of 15.9% in 2023, which isn’t bad at all, but it still lagged behind U.S. equities. In January, it’s down over 2%.

Dividend stocks offer reliable income and can help smooth returns in a choppy market. Because they tend to hail from the ranks of well-established large caps, dividend stocks as a whole have also ridden the large-stock wave higher.

However, because many fast-moving big techs don’t pay dividends, dividend stocks, as a group, underperformed domestic growth stocks and the S&P 500 as a whole in 2023.

“Dividend stocks are expected to continue providing a reliable income stream in 2024,” says Kovar. “Companies with a strong history of dividend payouts can offer a buffer against market volatility, appealing to income-focused investors.”

A January report from Bank of America says 2024 could be a banner year for dividends. BofA analysts cited several reasons for that thesis, including: “Dividends bridge a gap between muddled macro signals that stymie a full cyclical/small cap recovery,” along with waning credit risk as the Federal Reserve pauses rate increases, or even cuts rates.

Bank of America also notes that trillions of dollars are parked in cash in retirees’ accounts. If rates on short-term debt instruments fall, that would favor inflows to income-generating equities.

Reliable dividend payers can be found among the list of dividend aristocrats, which include Coca-Cola Co. (KO) and Emerson Electric Co. (EMR).

Long-term bonds, typically those with maturities of 10 years or more, have both advantages and drawbacks.

On the plus side, they often provide higher yields, allowing investors to lock in a fixed return over an extended period.

However, the trade-off is increased risk as prices are more sensitive to interest rates and market fluctuations. Additionally, there’s often an opportunity cost to holding long-term bonds, as more attractive investments may come along while investors hold a bond with a 20-year maturity.

Vanguard Long-Term Bond Fund (BLV) tracks the long-term, investment-grade U.S. bond market. That ETF is down 2.8% in January as investors remain uncertain about the Fed’s upcoming rate cuts.

In a December blog post, “Fixed Income: Can 2024 Be the Year of the Bond?” global asset manager Abrdn pointed out that investors can still get high yields from long-term bonds.

“Meanwhile, inflation is finally coming down, which means interest rates in large economies such as the U.S., Europe and the U.K. have likely peaked,” wrote Craig MacDonald, Abrdn’s global head of fixed income.

“However, to turbocharge bond returns, central banks will need to start cutting interest rates by the second half of next year,” MacDonald wrote.

Short-term bonds, as the name suggests, have relatively short terms to maturity, usually in the one-to-three-year range.

These bonds are less sensitive to interest rate changes, but because investors take fewer risks when purchasing short-term bonds, they typically receive lower rates.

The iShares 0-5 Year Investment Grade Corporate Bond ETF (SLQD) is down 0.1% in January, outperforming longer bond indexes.

“Short-term bonds could be a safer bet in 2024, offering lower interest rate risk compared to long-term bonds,” says Kovar. “They provide a relatively stable income stream with less exposure to market volatility.”

High-yield bonds are riskier than those deemed investment grade, something investors should be aware of when they add these bonds to a portfolio.

The timing could be right for an allocation into longer-term, high-yield bonds, says Matt Willer, managing director of capital markets and a partner at Phoenix Capital Group Holdings in Denver.

“It’s not every year, or even every five years, that you get to reposition capital at the peak of an interest rate cycle,” he says.

“If you can find high-yield bonds with a reasonably long duration with respectable credit quality, this is an ideal time to deploy a portion of your investable capital into longer-dated higher-yield bonds,” he adds.

The rationale here is that as rates decline in the coming year or years, investors have locked in a higher rate before rate cuts begin.

By locking in long-term high yield, Willer says, investors not only have an attractive, effective rate of return from the yield, but they will also get the appreciation of the principal as rates decline.

Two high-yield bond funds that are popular with investors who are comfortable with the risk are iShares iBoxx $ High Yield Corporate Bond ETF (HYG) and Schwab High Yield Bond ETF (SCYB).

Investors often turn to commodities to diversify away some equity market risk.

Commodities aren’t a monolith; for example, oil behaves in a very different way from wheat futures. But as investors saw in early 2022, at the start of the war in Ukraine, both saw spikes on concerns about supply.

“We anticipate both dynamics to continue for the foreseeable future, supporting commodity prices as demand picks up but supplies need more time to balance with demand,” wrote analysts at the Wells Fargo Investment Institute in a December 2023 report.

“Any pullback in commodity prices in 2024 may offer opportunities for investors to add exposure to the asset class at a reasonable cost,” analysts said.

Abrdn Bloomberg All Commodity Longer Dated Strategy K-1 Free ETF (BCD) or Global X Uranium ETF (URA) may fit the bill for commodities investors seeking diversification.

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