I’m John Persinos, editorial director of Investing Daily. With me today is my colleague, Katherine Beem. She’s the new editorial director of our subsidiary, Street Authority.

Kat asked to interview me about my outlook for the financial markets in 2024. I’m always happy to sit down and chat with Kat. She and I go way back.

The article below is a condensed transcript; the video contains charts and more details. Kat’s questions to me are in bold.

Are you bullish about stocks in 2024 and if so, why?

Generally speaking, I am. A major reason is that Federal Reserve tightening is coming to an end.

The Fed has raised its benchmark rate 11 times so far in its campaign to curb inflation. The fed funds rate currently hovers at about 5.33%, which is a 22-year high. The central bank has embarked on the most aggressive policy moves since the early 1980s.

Current market expectations for the path of the fed funds rate, according to scheduled Federal Open Market Committee (FOMC) meetings, is for a series of pauses and then a 0.25% cut in May 2024 to 5.00%-5.25%.

Liquidity is the lifeblood of markets. History shows that when the Fed finally pivots on rates, equities soar in response.

The 10-year U.S. Treasury yield has dipped below 4.2%, reaching a level not observed since September. The significant decline of this benchmark bond yield has been manna from heaven for the stock market. As yields fall, stocks tend to rise.

What’s encouraging to you about the economic backdrop?

Economic growth is decelerating but remains on track, a “Goldilocks” scenario that the Fed likes to see. Despite robust U.S. gross domestic product (GDP) growth, signs of weaker household consumption and a decelerating labor market are emerging.

However, this slowdown is gradual, aligning with the Fed’s “dual mandate” to combat inflation without tipping the economy into recession. Picture it as a smooth transition to a slower lane instead of a sudden swerve into a ditch.

To be sure, tech stocks have been on a tear, but stock market leadership has expanded beyond the usual suspects. The rally has included shares across most sectors, not just a handful of mega-cap tech names. Small-cap and cyclical stocks are taking the stage, suggesting economic and stock market vibrancy as we head into 2024.

Which sectors look the most promising to you in 2024?

For the underdogs in the market, including bond proxies, small-caps, and value-style investments, there’s an opportunity to catch up next year as the headwind of rising yields subsides.

As I’ve just explained, a major factor driving stock market gains during the last two months of 2023 has been the collective feeling on Wall Street that we’ve witnessed peak interest rates.

Which means that I particularly like interest rate-sensitive sectors for 2024, especially utilities and real estate investment trusts (REITs).

As investors position their portfolios for next year, they should consider utilities stocks, REITs, and other sectors that have been laggards, because they’re poised to become leaders. Utilities and REITs got clobbered in 2023, but they’re set to rebound when the Fed pivots in 2024. That means value plays are ready for the picking.

What about small-cap stocks in 2024?

Accelerating economic growth is likely to provide a catalyst for small-cap outperformance next year. Historically, small-cap stocks have demonstrated a heightened sensitivity to economic conditions, flourishing during periods of expansion.

Smaller companies, often nimble and innovative, are better positioned to capitalize on new opportunities that arise with economic growth. Unlike their larger counterparts, small caps can swiftly adapt to changing market dynamics, allowing them to leverage emerging trends. This adaptability not only positions them favorably in a recovering economy but also enhances their growth potential.

Another factor bolstering the case for small-cap outperformance in 2024 is the high probability of a Federal Reserve interest rate cut. Looser monetary policy stimulates economic activity, making it easier for businesses, particularly smaller ones, to access capital and fuel expansion.

But bull markets don’t move in a linear fashion. We’re likely to see dips along the way, depending on geopolitical turmoil or any economic disappointments. As we stand on the cusp of a new year, investors should adopt a balanced equity allocation, leveraging sector setbacks as opportunities to diversify across underperforming asset classes.

You’re an expert on the aerospace/defense sector. Do you recommend military contractor stocks for 2024?

Indeed, I do. Global defense spending in 2023 reached a jaw-dropping $2.2 trillion, the highest level in inflation-adjusted dollars since the end of the Cold War in 1991, according to the latest data from the Stockholm Research Peace Institute, which compiles a tally every year. As of last year, the U.S. shipped 45% of the world’s weapons exports, roughly five times more than any other nation.

The Israel/Hamas and Russia-Ukraine wars, and worsening antagonism among the U.S., Russia and China, have fueled a push in Washington to boost Pentagon funding even further. Therein lays an investment megatrend for 2024 and beyond.

Orders now pouring into the coffers of U.S.-based aerospace/defense contractors will generate lucrative work for years, posing a bonanza for investors with exposure to the sector.

Artificial intelligence (AI) is all the rage. Is the bloom off the rose, or will AI continue to provide a bullish impetus for stocks?

AI mania slowed in October, but it’s back again and I think the momentum will carry into 2024 and well beyond.

In system theory, AI is what’s known as a “singularity,” whereby a small change can cause a huge, exponential effect. A singularity also implies changes that are uncontrollable and irreversible, spawning unforeseeable changes (and perhaps an existential threat) to human civilization.

The outperformance of the technology sector year to date has been driven by AI, a dynamic that has in turn boosted the broader indices.

The size of the global AI market was valued at $136.55 billion in 2022 and it’s projected to expand at a compound annual growth rate (CAGR) of 37.3% from 2023 to 2030, according to Grand View Research.

The global market for AI in asset management was worth $2.6 billion in 2022 and it’s projected to expand at a CAGR of 24.5% from 2023 to 2030, according to a new and separate report from Grand View Research. The report states: “Asset and wealth management firms are exploring potential artificial intelligence-based solutions to improve their investment decisions and extract insights out of their historical data.”

What’s more, a recent survey by Market Makers has found that 9 out of 10 hedge fund traders will use AI in 2023 to achieve alpha.

It’s clear that AI isn’t just a fad. It’s revolutionizing our daily lives and the investment world. The key is to find smaller “pure plays” in AI that are flying under the radar. The mega-cap tech behemoths that have heavily invested in the technology already are pricey.

Any other areas in tech that you like for 2024?

Fueling the tech sector’s prosperity is continual innovation, not just in work-at-home digital capabilities but also in renewable energy, health services, virtual/augmented reality, robotics, artificial intelligence, autonomous vehicles, orbital satellites, fifth generation (5G) wireless, and the Internet of Things.

These “animal spirits” in the tech sector will lift the broader stock market in 2024. Now’s the time to get into position.

Thanks for your time, John!

Editor’s Note: Interest rate sensitive assets that underperformed in 2023 are setting the stage for a rebound in 2024.

Specifically, as you recalibrate your portfolio allocations for next year, turn to utilities stocks. The utilities sector has gotten clobbered lately by rising interest rates, but it’s poised to rebound as bond yields continue their descent. That means value plays are ready for the picking.

However, you need to pick the right ones. For our list of the highest-quality utilities stocks, click here now.

John Persinos is the editorial director of Investing Daily.

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