Soft Landing: Investment Implications for 2024

The economy is now expected to achieve a soft landing, that is, maintaining positive economic growth with reduced inflation and avoiding high unemployment or recession. A soft landing occurred due to the Federal Reserve’s interest rate hike. Interest rates to avoid too high inflation are relatively rare, and it now looks like we may be heading down that path. This is why the market has exploded recently. This is especially true after the Federal Reserve’s recent meeting, which suggested rate cuts could begin around 2024.

Of course, both stock and bond markets love falling interest rates, increasing the value of existing investments. In fact, the stock market tends to perform best when the federal funds rate remains stable. (For more on this topic, see two previous articles on Seeking Alpha here: and here).

As of now, these rates will remain unchanged after July 2023. Analysts now expect no further interest rate changes until at least March and possibly mid-2024. The Fed must maintain a delicate balance between raising interest rates. Lowering interest rates too high could cause the economy to stagnate, or cutting interest rates too early could create an overheated economy and further worsen inflation. My guess is that rates won’t change for more months to avoid risking either outcome.

So, if you, like me, agree that you are now experiencing the beginning of one of those very rare soft landings, how can you position your portfolio to gain maximum benefit from this?

First, let’s review what some other analysts have suggested.

Analyst Opinion

– According to an article on cnbc.com, it dates back to early August 2023.

“The fact that we may see a soft landing or avoid a recession altogether does not mean that people should change their strategies for building their portfolios to build safety nets and prevent recessions.

The article goes on to say that cash-related investments, such as money market funds and government bonds, are much more attractive now than they would have been if interest rates were much lower.

My opinion is that these should be included in a diversified portfolio, but only in relatively small amounts, depending on your risk tolerance.

And now total returns will also be more promising when investing in bond funds. As mentioned above, if the Federal Reserve begins to cut interest rates, bond prices will rise. Some advisors also continue of their bond portfolio. So while some people suggest moving from short-term funds, such as short-term bond funds, to medium-term funds, others go as far as recommending longer-dated bond funds to maximize “bang for your buck.”

-From a recent article published by Fidelity Investments in mid-November:

A soft landing scenario involves a slight downward trend across major economies without a major shock that throws markets off course. The decision to keep interest rates high for longer will push inflation higher to a level the central bank is comfortable with. Interest rates could then be adjusted and reduced to ease pressure on indebted households and businesses.

… There will be unique opportunities in growth stocks, real estate logistics and revolving credit. There will be unique opportunities in growth stocks, real estate logistics and revolving credit. Less defensive companies and mid-cap companies are more likely to outperform the market.

It also says:

… That’s good news for stocks. This is especially good news for stocks other than the big names that led S&P 500 performance in 2023, and somewhat positive for bonds. In a favorable environment for risky assets, high returns would also be good.

and

… There should be room for careful, well-researched purchases of high-yield assets that offer investment-grade credit and high single-digit yields.

– In an article published in the Wall Street Journal around the same time, the author says:

According to Dow Jones Market Data, small company stock prices are signaling a recession, falling behind the S&P 500 by the largest margin since 1998. These companies are particularly sensitive to borrowing costs and tend to generate more of their profits domestically.

and

This suggests that it may make sense to invest in an ETF such as the Vanguard Russell 2000 ETF (VTWO).

-Finally, the article here on December 8, 2023 quoted the opinions of several investment experts. According to one source, 70% of the S&P 500’s double-digit gains were the result of just seven large technology stocks, with the remaining 493 stocks “not getting much love.” The expert expects healthcare, energy and industrials, which underperformed in 2023, to catch up in 2024.

From my perspective

The various opinions outlined above may seem too diverse to put into practice, but I will now present what I believe is the best option.

I agree with most of the comments above, but when we look at economic sectors, we see cases where some parts are grossly overvalued while others are slightly undervalued. The latter seems to be a better choice than the former.

What appears to be an investment ~ degrees Even in a soft landing scenario, technology and growth, and even the large-cap Vanguard S&P 500 ETF (VOO), are overvalued to succeed.

Sectors where the market has lagged the market this year are particularly consumer staples, energy, healthcare and utilities. All of these regions appear likely to make a comeback in 2024 under a soft landing scenario.

As mentioned above, bonds like the Vanguard Total Bond Market ETF (BND) will perform much better than they have in previous years, and even better in the unexpected consequences of a recession. Long-term bond ETFs like the Vanguard Long-Term Treasury ETF (VGLT) can be an investment home run.