Don't Pop the Champagne Just Yet: Why the Stock Market Rally Might Fizz Out in 2024

December 27, 2023

The rise of the stock market in 2023, fueled by hopes of a soft economic landing and tamed inflation, has investors dreaming of champagne toasts in 2024. But amidst the celebrations, a drumbeat of caution is brewing: can a sunny economic outlook guarantee a cloudless sky for Wall Street? While a continued rally isn't out of the question, several looming factors suggest the party might end sooner than some expect. Affinity Capital has been overly cautious with your hard-earned money in 2023 as the issues we have outlined below have been brewing all year. The majority of gains in 2023 were, for the most part, led by thin leadership in some of the largest stocks. This is not a sign of a healthy market.

1. The Fed's Tap Dance: From Hawk to Dove and Back Again?

The Federal Reserve's pivot away from its aggressive rate hikes was the main oxygen for the 2023 rally. But the dance isn't over yet. While “slowing inflation” might prompt lower rates in 2024, the central bank isn't known for its tango prowess. If inflation proves more stubborn than anticipated, another hawkish turn could send shockwaves through the market, especially in interest-rate sensitive sectors like tech and growth. Keep in mind, a slowing rate of inflation does not mean prices are falling – it means that inflation is still rising but at a slower rate!

2. Earnings: Will the Music Stop?

Corporate earnings, the bedrock of stock prices, have largely held up despite economic headwinds. However, the question is whether they can keep the beat in a slower growth environment. Rising costs and potential wage pressures could squeeze profit margins, putting downward pressure on stock prices even if the economy keeps its head above water. A note about corporate earnings and Wall Street: When

a company “beats” or “misses” their quarterly earnings – It is based on the averages of dozens of analyst forecasts which are constantly updated throughout the quarter and year.  The reaction of buyers and sellers to the headline earnings reports may not always indicate the whole story. On average 90% of the 500 stocks in the S&P 500 have BUY ratings. Keep in mind, Wall Street firms are marketing their products and services to these same companies they are analyzing.   

3. Geopolitical Jitters: A Wild Card on the Table

The world stage remains a tinderbox, with ongoing conflicts in Ukraine and the Mid-East, tensions simmering on other fronts. A major escalation or economic shockwave emanating from geopolitics could trigger risk aversion and send investors scurrying for safe havens, leaving equities in the dust. This is especially true with Iran and their proxies in Lebanon, Iraq and Yemen.

4. The Debt Dance: A Burden We Can't Ignore

Soaring national debt, both in the US and globally, casts a long shadow over economic stability. With interest rates on the rise, servicing this debt becomes more expensive, potentially diverting resources away from productive investments and impacting corporate and consumer finances. A debt crisis, though unlikely in the immediate future, could be a major spoiler for any sustained market rally. Federal spending jumped from $4.45 trillion in 2019 to $6.21 trillion in 2023, according to the Congressional Budget Office. That is a 40 percent increase in four years. The proposed 2024 national budget is 9.5 percent higher than 2023 with an estimated deficit of $1.84 trillion. We must return to pre-COVID budgets based on actual revenue and curtail spending. The proposed budgets through 2033 show well over a $1.50 trillion deficit each year! The bond markets have been flashing a warning signal for over a year with annualized interest rate returns for U.S. Treasury Bills of less than one month delivering more than those of 30-year Bonds.

5. Valuations: Back to Reality Check?

While not as lofty as during the pandemic frenzy, current valuations still leave some room for concern. A 25% gain in 2023 has baked in optimism about the future, and any missteps on the economic or corporate earnings front could lead to a sharp correction, bringing valuations closer to long-term averages.

So, what does this all mean?

Investing is not a linear journey, and 2024 promises to be anything but predictable. While the recent economic improvements are cause for cautious optimism, investors should keep their champagne on ice for now. A soft landing for the economy doesn't automatically translate to a smooth ride for the stock market. Vigilant monitoring of key factors like the Fed's stance, corporate earnings, and geopolitical risks will be crucial for navigating the year ahead. Remember, staying grounded in fundamentals and embracing a healthy dose of skepticism will serve you well, whether the market celebrates or sulks in 2024.

In conclusion, the stock market rally of 2023 might not be the harbinger of a prolonged bull run. Several potential roadblocks lie ahead, each with the power to disrupt the party. While cautiously optimistic for the economy, investors should approach 2024 with a clear head and a diversified portfolio, ready to weather whatever the market throws their way.

We remain committed to helping you achieve your investment objectives. Please do not hesitate to reach out with any questions or concerns. We welcome your feedback and are always available to visit. Thank you for the opportunity to serve you and your family and to collaborate with you for—Wealth Management for Life!

 

 

Fed Cuts Rates: What It Means

October 29, 2025
The Federal Reserve announced today that it is cutting interest rates by a quarter of a percentage point, bringing the federal funds target range down to 3.75% to 4.00% . While it may sound like just another number, this decision carries real implications for the economy and financial markets. Why the Fed Made This Move The Fed has two primary goals: keep inflation under control and support a healthy job market. Over the last year, much of the focus has been on the first goal. Inflation has been stubborn, running higher than the Fed’s 2% target. Now, however, concerns about the job market are moving to the forefront. Hiring has slowed, and the Fed has acknowledged that risks to employment are rising. With economic data disrupted by the government shutdown, the central bank is working with incomplete information. In that uncertainty, officials chose to act in what they call a “risk management” mode, providing a bit of cushion for the economy. What This Means for the Economy Borrowing and Spending Lower rates typically filter into lower borrowing costs for businesses and households. That can mean slightly cheaper loans, credit cards, and mortgages. We have already seen mortgage rates dip in anticipation of this move, and that could provide some relief for homebuyers. Business Investment When financing is less expensive, businesses are more likely to expand, invest, and hire. The Fed hopes this cut provides enough encouragement to keep the labor market steady. The reality, however, is that a single quarter-point cut may only have a modest impact unless overall demand in the economy improves. Inflation Still in the Picture The challenge is that inflation has not gone away. By easing policy while prices are still running above target, the Fed runs the risk of letting inflation flare up again. That balancing act—supporting jobs without reigniting inflation—will be the key tension in the months ahead. Housing and Consumers The housing sector is especially sensitive to changes in interest rates. Builders and buyers often respond quickly when financing costs move even a little lower. At the same time, for households carrying debt, lower rates can make it easier to manage payments or refinance. But if wages stagnate or unemployment rises, those benefits may be limited. Markets and Volatility Markets had largely anticipated this cut, so the bigger story is what happens next. Investors are already debating whether this will be the first of several cuts, or just a one-off adjustment. That uncertainty often creates volatility in both stocks and bonds. The Bigger Picture The Fed has made it clear that there is no preset course. Officials will continue to watch the data and adjust policy as needed. That means future moves could go in either direction depending on whether inflation proves sticky or the job market weakens further. What does this mean in practical terms? It means we are entering a period where the Fed may be more reactive than proactive. Each new employment report, inflation reading, or sign of economic strength or weakness will take on outsized importance. Our Perspective For clients, the most important takeaway is that the Fed is signaling greater concern about the labor market, even as inflation remains above target. In other words, the economy is at a delicate point. The rate cut should provide some near-term relief, but it is not a magic fix. We are watching several key areas closely: The pace of hiring and unemployment trends Inflation data to see if price pressures start to ease or flare back up Housing activity, which could pick up if mortgage rates continue to drift lower The Fed’s move today is best seen as a stabilizing step. It shows policymakers are willing to provide support if needed, but it also highlights just how uncertain the path forward is. Periods like this can create noise in the markets, but they also underscore the value of staying focused on long-term goals. Our role is to keep a steady eye on developments, evaluate the implications, and make thoughtful decisions on your behalf. As always, we will continue monitoring the Fed’s actions and the broader economy, and we will keep you updated as the situation evolves.

Market Pulse: “Shutdown Jitters, Gold Glitters, Oil Slips”

October 1, 2025
Markets are navigating a new U.S. government shutdown, softer recent labor signals, and sliding oil while investors keep one eye on the Fed’s path after its September meeting. Equities are mixed but near highs, leadership remains tilted toward technology with improving breadth, and defensive assets like gold are seeing renewed demand. What moved today (Oct 1) : After notching strong September and Q3 gains yesterday, with the S&P 500 up about 0.4 percent on September 30 and the Dow setting another record close, U.S. stocks were choppy this morning as the shutdown began. The Nasdaq and Dow traded slightly higher intraday while the S&P hovered near flat. Overseas, the FTSE 100 hit a record as healthcare shares rallied. Gold pushed to fresh records as investors hedged against policy and data uncertainty. Current events to watch: U.S. government shutdown: With funding lapsed, key economic releases may be delayed, including Friday’s jobs report. This muddies near-term visibility for the Fed and markets. Furloughs and suspended data flows could weigh on growth in the fourth quarter if the shutdown lasts. The Fed’s recent guidance: At the September 17 meeting, the Fed’s projections suggested a lower policy path into 2026 as inflation cools, keeping the possibility of additional rate cuts alive. August PCE inflation printed at 2.7 percent year-over-year, reinforcing a gradual disinflation trend heading into the final quarter of the year. Commodities reset: Crude oil has retreated into the low $60s (WTI) on talk of potential OPEC+ supply increases and a softer global manufacturing pulse. The EIA’s outlook anticipates further price softness as inventories build into early 2026, which could provide relief for consumers and businesses. Sectors and standouts: Technology and growth: The third-quarter rally was led by large technology companies, but participation broadened across more sectors, which is healthy for the durability of the uptrend. Elevated valuations mean earnings delivery remains critical in October. Defensives and healthcare: In Europe, healthcare leadership helped drive record U.K. index levels today. In the U.S., defensive sectors have provided ballast on volatile days as bond yields eased. Energy: Lower oil prices have weighed on energy shares but should ease input costs for transportation, consumer, and industrial companies if sustained. Why this is happening: Markets are balancing two forces. On one side is a soft-landing narrative with cooling inflation, prospects for additional Fed cuts, and resilient corporate earnings. On the other side is event risk from the government shutdown, murkier global growth, and shifting oil supply expectations. As long as inflation trends continue to drift lower and policy remains supportive, dips have been bought, but when data flow is disrupted, headlines can dominate. What it could mean next: Volatility watch: With fewer data releases if reports are delayed, markets may be more sensitive to headlines. Credit spreads and market breadth are worth watching since deterioration there would be an early warning sign. Rates and policy: Fed commentary and any clarity on funding negotiations may set the tone. Markets currently lean toward additional easing by year-end, and confirmation or pushback from officials can move both equities and rate-sensitive sectors. Oil and inflation: If crude remains subdued, disinflation into year-end is supported, which is constructive for risk assets as long as growth holds up. Bottom line : Despite today’s wobble, the overall trend remains constructive but sensitive to headlines. A diversified approach, focus on quality balance sheets, and disciplined rebalancing remain prudent as we enter a period where policy developments may matter more than usual data. As always, we welcome your questions and are here to support you. At the heart of everything we do is our commitment to “Wealth Management for Life,” providing enduring guidance for you and your family’s financial success.

Fed Makes First Cut—Markets React with Hope and Caution

September 17, 2025
The big news today: the Federal Reserve cut interest rates by 25 basis points , lowering the federal funds target range to 4.00%–4.25% . This is the first rate cut since 2023, and it marks what could be the beginning of a new easing cycle. Chair Powell acknowledged that the labor market is showing signs of strain —job growth has slowed, unemployment has edged higher—while inflation, though still above target, has been gradually moderating. One member of the committee even pushed for a larger 50-point cut, underscoring the growing concern about keeping the economy on stable footing. Markets largely anticipated this move, and that helped set the tone for the week. The S&P 500 and Nasdaq hit new record highs earlier in the week , reflecting investor optimism that lower rates will support growth. Small-cap stocks also enjoyed a bounce, showing that confidence wasn’t limited to the mega-cap names. At the same time, Treasury yields fell toward 4% before inching back up, a sign that bond investors are weighing both the near-term relief of rate cuts and the longer-term risk that inflation remains sticky. Economic data released this week helped frame the Fed’s decision. August inflation readings came in a touch hotter than expected , with headline CPI up 2.9% year over year and core inflation at 3.1%. Those numbers are still above the Fed’s target, but not high enough to derail its decision to pivot toward easing. Meanwhile, energy prices moved higher on global supply concerns, giving the energy sector a lift, while technology—especially companies tied to AI—continued to outperform. Beyond the numbers, politics are adding a layer of uncertainty. Recent controversies around Fed appointments and legal challenges to sitting governors have raised questions about the central bank’s independence. Markets are watching closely to see whether these distractions influence policy direction. Globally, other central banks, including Canada’s, have also begun shifting to more accommodative stances, reinforcing the sense that the next phase of policy is easing across major economies. So what does this mean looking ahead? Markets could see more upside in the short run , especially in interest-rate sensitive areas like housing and consumer spending. But investors should also prepare for continued volatility —each new jobs or inflation report has the potential to swing sentiment quickly. If inflation proves stickier than hoped, long-term Treasury yields could rise even as short-term rates fall, a dynamic that might pressure parts of the financial sector. In short, the path ahead is unlikely to be smooth, but the Fed has signaled it is prepared to act again, with two additional cuts projected before year-end. Bottom line : The Fed has taken its first step toward easing, reflecting concerns about growth while balancing persistent inflation risks. Markets are encouraged, but optimism remains cautious as investors adjust to a more complex mix of risks and opportunities. As always, we welcome your questions and are here to support you. At the heart of everything we do is our commitment to Wealth Management for Life —providing enduring guidance for you and your family’s financial success.