Hi, I’m John Persinos, editorial director of Investing Daily. For today’s Mind Over Markets column, I interviewed Jim Pearce, chief investment strategist of our flagship publication, Personal Finance. Jim also oversees the trading services Personal Finance Pro and Mayhem Trader.

Jim began his career as a stockbroker in 1983 and over the years has managed client investment portfolios for major banks, brokerage firms, and investment advisors. As we face the start of a new year, I’ve decided that now’s an opportune time to tap his considerable expertise.

In 2024, Personal Finance will celebrate 50 years of existence. Founded in 1974, PF has made money for its subscribers, in bull and bear markets. Let’s see what Jim Pearce has in mind for the publication’s “Golden Anniversary.” Our discussion was lively, with a few contrarian insights that might surprise you.

The article below is a condensed transcript; my questions to Jim are in bold.

It’s often risky, if not foolhardy, to make sweeping long-term predictions. An unforeseen event, for instance a pandemic or overseas war, can throw an analyst’s prognostications into a cocked hat. That said, investors need some sort of compass for the new year. Generally speaking, how do you think the stock and bond markets will fare in 2024?

I expect the stock and bond markets to rebound strongly in 2024. In fact, it may have already started. In early November, we got good news about the economy and inflation.

As a result, the S&P 500 Index gained more than 7% during the first half of the month while the yield on the 10-year Treasury Note fell from nearly 5.0% to below 4.5%. That means Wall Street no longer believes that a recession is inevitable. It also means that the Federal Reserve may be done raising interest rates.

I’m not necessarily criticizing the Fed’s monetary policy decisions, but frankly, I’m sick of talking about the Fed. I’m sure you are, too. However, we have no choice. The central bank controls liquidity, and liquidity is the lifeblood of the financial markets. Wall Street is betting that the Fed will start to cut interest rates sometime in mid-2024. What’s your view?

I know a lot of people like to bash the Fed, but I think it has done an outstanding job of keeping the economy afloat throughout the pandemic and ensuing surge in inflation. If you’d told me four years ago that a pandemic was about to shut down the global economy, I would have expected the stock market to crash like it did fifteen years ago. Instead, the stock market fell but then rebounded quickly while unemployment remained near record lows.

That said, I think the Fed will be reluctant to start cutting rates so soon after raising them unless the economy goes into a tailspin. Of course, there will be political pressure for the Fed to cut rates heading into the general election in November, but thus far Fed Chair Jerome Powell has chosen economic stability over political expediency throughout this entire process.

I see no reason to believe Powell will act differently in 2024, but at some point, a rate cut may be necessary if the economy bogs down.

When the Fed pivots, certain sectors that were laggards in 2023, such as utilities stocks and real estate investment trusts (REITs), should become leaders. How else will sector rotation play out?

Once interest rates, and bond yields, start dropping, income investors will once again revert to high dividend payers such as REITs and utilities. Also, consumer discretionary stocks should come back into favor as the cost of credit goes down.

Finally, I would expect industrials to perform well as the economy expands. All those sectors underperformed the overall stock market in 2023, so the scenario I am describing for 2024 is essentially a reversal from the prior year.

Pinpoint major investment predictions that you made about 2023 that turned out to be correct.

A year ago, I said “A return to normalization will be the dominant theme” in 2023. That turned out to be correct. As I expected, the stock market bottomed out and staged a strong rally. The Fed paused its steady stream of interest rate hikes in July and the bond market firmed up.

I also predicted that energy stocks would lose their momentum in 2023, which did in fact happen as oil prices fell over the second half of the year. I also stated that I expected “the rate of inflation for food prices to drop in half from its peak above 10% in 2022.” By October 2023, the trailing 12-month consumer price index (CPI) rate of inflation was down to 3.3%.

I don’t want to put you on the spot, but in the interest of intellectual honesty, which of your predictions about 2023 turned out to be wrong?

When asked for a long-shot prediction, I said that I expected “small-cap stocks to outperform large-cap stocks.” At that time, I did not expect the Fed to raise interest rates as much as they did in 2023, which hurt small businesses more than big ones.

For that reason, Wall Street shunned small-cap stocks for most of the year and that prediction proved incorrect.

If it’s any consolation, Jim, you were a year early. I think we both agree that small-cap stocks are poised to soar in 2024. Accelerating economic growth is likely to provide a catalyst for small-cap outperformance in the coming months. Historically, small-cap stocks have demonstrated a heightened sensitivity to economic conditions, flourishing during periods of expansion. Falling interest rates should also help the small fry.

That’s all true.

Well, 2023 was a tumultuous year. You still got more things right, than wrong. How are you positioning the Personal Finance Growth Portfolio for 2024?

I expect to add several new names to the Personal Finance Growth Portfolio in 2024. I only added two new positions in 2023 due to uncertainty over inflation.

I added Tesla (NSDQ: TSLA) in January when it was priced around $120, and six months later it was above $280. In September, I added Lear (NYSE: LEA) as an indirect play on the electric vehicle (EV) market, so I’m excited to see how it performs in 2024.

Going forward, I will be emphasizing companies with high cash flows and stable operating margins that can invest in growth without taking on a lot of new debt.

What about the Income Portfolio?

As we discussed previously, I think REITs will rebound in 2024. We already have five REITs in the Income Portfolio, so I probably won’t add any more. However, we only have two master limited partnerships (MLPs) in the portfolio, so I may add one or two once I believe oil prices have stopped falling.

I might add another business development company (BDC), since demand for small business financing should increase as the economy gets back on track.

You’ve called the investment shots at Personal Finance for nearly a decade. Over those years, you’ve racked up an impressive track record. I know this first-hand because I edit the copy. You’ve delivered some whopping gains to readers. Which of your recent investment picks make you the proudest?

Without a doubt, adding Nvidia (NSDQ: NVDA) to the Personal Finance Growth Portfolio in October 2022 was perhaps the best call I’ve ever made. At that time, it was priced near $115. One year later, it was trading around $470. I wish I could say they all turn out that well, but that was truly an astounding pick!

I thought then that artificial intelligence would become a meaningful revenue generator for Nvidia along with autonomous driving, gaming, and robotics. And since Nvidia makes some of the most sophisticated graphics processing units (GPUs) in the world, it stood to reason that it would directly benefit from those trends.

Rapidly rising interest rates sent many tech stocks spiraling lower in 2023 as Wall Street discounted future earnings at a steeper rate. However, much of that selling was indiscriminate in my opinion, allowing us to pick up Nvidia at what I considered a bargain basement price.

Discuss a couple of recent trades for Mayhem Trader that turned out exceptionally well for subscribers.

From July through November, the S&P 500 Index gained no ground in 2023. However, during that span I booked gains of 375% on a put option on Owens Corning (NYSE: OC), 66% on a call option for The Lovesac Company (NSDQ: LOVE), 106% on a call option for Logitech International (NSDQ: LOGI), 100% on a call option for Discover Financial Services (NYSE: DFS), 367% on a put option for Driven Brands (NSDQ: DRVN) and 108% on a call option for Dick’s Sporting Goods (NYSE: DKS).

[Laughs] Don’t tell me you can’t make money in a flat market!

Impressive! Thanks for your time.

PS: My colleague Jim Pearce has just provided you with invaluable investment insights. Right now, we’re making a special subscription offer for his publication, Mayhem Trader. To learn more, click here now.

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