Election Year, Wars, and Pundits!

January 01, 2024

Happy New Year, and welcome to 2024! By all accounts and speculation, this year is poised to be quite impactful. On one hand, TV pundits are predicting the potential for the biggest single crash in our lifetime in 2024 https://www.foxbusiness.com/media/us-economist-predicts-2024-bring-biggest-single-crash-lifetime (thanks to one of your fellow subscribers for sending this to me).  On the other hand, we have the Federal Reserve looking to cut rates once they meet their targets with the stock market having priced in 3 rate decreases. 

Additionally, it's an election year, and for those who have been longtime subscribers since 2016 and 2020, you'll recall that markets dislike unpredictability, which tends to accompany election years.

Finally, we have one (Ukraine-Russia), no two (Israel-Gaza), wait, three (Houthi/Iran-World) possible conflicts, with hold on a second, Taiwan too?  History shows that war introduces uncertainties that make it challenging for stock markets to maintain efficiencies.

We're also navigating the regular business cycles. Apart from the technical recession we entered in Q1-Q2 of 2022 (which I indeed consider a recession), we haven't experienced a business cycle recession since 2007-2009 (COVID doesn’t count in my books). The recession before that was 2001.  I’m not sure we are ever “due” a recession, but the obvious statement is we will have one. However, I do not think this is the year.

We are saying goodbye to the old I Fund and starting with a new index in 2024.  This new index is the MSCI ACWI IMI ex USA ex China ex Hong Kong Index. A very complex name for an International Fund that invests in 21 of 23 developed markets excluding the USA, China, and Hong Kong.  I have been somewhat vocal about the proposed changes to the I Fund over the past few years.  I never thought it was appropriate to have service members’ only international fund investing in a CCP controlled economy.  The TSP has many Lifecycle Fund investors, and by default, a lifecycle fund investment would invest in the I Fund, potentially exposing every Lifecycle Fund investor to Chinese markets AND giving the CCP a significant capital infusion. Thankfully, through a bipartisan effort, our representatives fought this change, and now, we have the new I Fund. 

I have updated my system to reflect the new I Fund, and I have found it to be roughly the same. However, percentages do matter.  The new fund returned about 1% above the old fund over a 3 year period.  During this time, the new fund maintained a 1-2% lead over the old fund.  In short, it will not significantly impact my analysis, but it does seem to give us another percent or two, so I’ll be following it closely. 

For 2023, it was incredibly hard to judge the small cap markets, and I’m sure my pundits will note the incredible gains made in December by the S Fund.  The volatility of those stocks has been incredible, and against all odds, the S Fund outperformed the C Fund.   

I am very concerned about all the issues I listed at the beginning of this post.  War in the Middle East involving the Suez Canal could cause an increase in not only shipping rates but also an increase in oil prices. My bet is Iran will back down however or the US Navy will make swift work of the forces currently launching missiles and conducting attacks.

I am more concerned about the election year impact on the stock markets.  The good news is we may not have to contend with the noise of the primaries as both President Biden and former President Trump seem to have commanding leads, so the real news making issues will probably start to occur in July. Keep an eye on the interest rates, unemployment, and GDP numbers for the first quarter.  I know my S Fund fans will be against me, but I do not think the S Fund will continue to have the steam to outperform the C Fund in times of pending uncertainty.  I am staying 100% C Fund for the beginning of 2024.  Keep investing!