Categories
Long-Term Investing
5 keys to investing in 2024
Lawrence Kymisis
Equity Portfolio Manager
Oliver Edmonds
Fixed Income Portfolio Manager
Mike Gitlin
President and Chief Executive Officer

What a difference a year makes. At the start of 2023, market pessimism was widespread, investors braced for a recession, and many expected another down year in stocks. Instead, the economy proved remarkably resilient, inflation declined at a rapid pace, and U.S. stocks, as represented by the S&P 500 Index, soared 26.3%. Talk about surprises.


History has shown that the economy and markets seem to always find ways to surprise investors. Whatever is in store for investors in the year ahead, here are five keys to keeping your long-term plans on track.


1. Elections come and go, but results last a lifetime


Political news is sure to dominate the headlines in 2024. More than half of the world’s population is heading to the polls, from Taiwan to South Africa. And with debates raging over immigration, international policy and social issues, the U.S. presidential election is set to be particularly contentious.


Election uncertainty will likely trigger higher market volatility, particularly during the primary season. The good news: Volatility can often generate opportunities for patient investors.


“High-quality companies frequently get caught in political crosshairs, which can create a buying opportunity,” says equity portfolio manager Rob Lovelace. “But I typically try to look beyond the election cycle and aim for an average holding period in my portfolios of around eight years — essentially two presidential terms.”


Investors may have strong convictions about which candidate or political party will steer the U.S. in the right direction, but historically the party that prevails has had little impact on long-term market returns. Since 1936, the 10-year annualized return of U.S. stocks (as measured by the S&P 500 Index) made at the start of an election year was 11.2% when a Democrat won and 10.5% in years a Republican prevailed.


Red, blue and you: Politics don’t matter much for U.S. investing

The bar chart depicts that 10-year returns on a hypothetical $10,000 investment in the S&P 500 Index made at the start of a given election year between 1936 and 2012 were not substantially influenced by whether a Democrat or Republican won the election. The horizontal axis lists the ending value of a $10,0000 investment made at the start of an election year and held for 10 years. Presidential terms are indicated by party from 1936 to 2021. It shows that the average 10-year annual return starting in years a Democrat won was 11.2%, while the average 10-year annual return starting in years a Republican won was 10.5%. The 10-year periods, their ending value and which party held the White House are listed as follows: The ending value for 1936 to 1945 was $22,418 (Democrat). The ending value for 1940 to 1949 was $23,992 (Democrat). The ending value for 1944 to 1953 was $38,016 (Democrat). The ending value for 1948 to 1957 was $45,702 (Democrat). The ending value for 1952 to 1961 was $45,741 (Republican). The ending value for 1956 to 1965 was $28,561 (Republican). The ending value for 1960 to 1969 was $21,228 (Democrat). The ending value for 1964 to 1973 was $17,906 (Democrat). The ending value for 1968 to 1977 was $14,239 (Republican). The ending value for 1972 to 1981 was $18,769 (Republican). The ending value for 1976 to 1985 was $38,207 (Democrat). The ending value for 1980 to 1989 was $50,384 (Republican). The ending value for 1984 to 1993 was $40,208 (Republican). The ending value for 1988 to 1997 was $52,567 (Republican). The ending value for 1992 to 2001 was $33,755 (Democrat). The ending value for 1996 to 2005 was $23,836 (Democrat). The ending value for 2000 to 2009 was $9,090 (Republican). The ending value for 2004 to 2013 was $20,430 (Republican). The ending value for 2008 to 2017 was $22,603 (Democrat). The ending value for 2012 to 2021 was $46,257 (Democrat).

Sources: Capital Group, Standard & Poor’s. Each 10-year period begins on January 1 of the first year shown and ends on December 31 of the tenth year. For example, the first period covers January 1, 1936, through December 31, 1945. Figures shown are past results and are not predictive of results in future periods.

2. Cash might not be as attractive as you think


Investors went from risk averse to loss averse in 2023. Fearful investors shifted billions of dollars into cash and cash-equivalent instruments. It is natural to look for safety when uncertainty is high. And attractive rates on money market funds and cash equivalents may feel reassuring. But cash might not be as attractive as you think when you consider the opportunity cost.


Investors need look no further than their fourth quarter 2023 statements to see that staying on the sidelines comes with its own risks. In U.S. dollar terms, the S&P 500 Index, a broad measure of U.S. stocks, advanced 11.69% for the three months ended December 31, 2023, and the Bloomberg U.S. Aggregate Bond Index, a broad measure of the U.S. bond market, rose 6.82%.


Investors still on the sidelines could be missing out on future opportunities and putting their long-term goals at risk. ”I believe we’re on the cusp of a major transition where long-term investors can find attractive investment opportunities in stocks and bonds,” says Mike Gitlin, president and chief executive officer of Capital Group.


3. Innovation is alive and well, but diversification matters


Breakthroughs in artificial intelligence (AI) have captivated the world and sent share prices soaring for a handful of mega-cap tech companies. Some of these leading-edge firms will likely continue to be at the forefront of innovation as AI applications roll out across the economy, impacting the way we live and work. NVIDIA, for example, designs powerful computer chips needed to run AI applications, and Microsoft co-owns the popular AI app ChatGPT. But their recent successes have resulted in a U.S. stock market that’s more concentrated than it was in the dot-com era.


As of December 2023, the 10 largest companies in the S&P 500 accounted for 30.9% of the market capitalization compared with a 26.6% weighting for the 10 largest companies in March 2000.


With such a small number of U.S. tech stocks generating a sizable portion of overall market returns, the potential benefits of diversification weren’t obvious last year. But broad diversification across regions and industries remains a hallmark of portfolios positioned to help investors pursue their objectives through market cycles.


“Given the level of economic uncertainty heading into this year, I believe diversification is as essential as ever,” says portfolio manager Lawrence Kymisis. “And I believe there are promising investment opportunities among U.S. tech leaders, as well as dividend payers and leading global companies.” Indeed, Europe and Asia are home to pioneers in other industries, from aerospace to factory automation. For example, France’s Safran, the world’s top producer of narrow-body aircraft engines, is developing engines in partnership with General Electric that could reduce emissions by 20%. In Japan, SMC is a leader in robotic equipment components and semiconductor production.


4. The comeback story in bonds may just be getting started


Bonds have recently failed to offer the relative stability and diversification investors have grown to expect. In 2022, bonds declined in tandem with stocks for a full calendar year for the first time in 45 years. Bond market volatility continued for much of 2023.


But the picture has brightened considerably in recent months. With inflation falling faster than expected, the U.S. Federal Reserve has indicated it is done raising interest rates — news that triggered a fourth-quarter rally across bond markets. The end of a tightening cycle has historically been a good time to own bonds.


What’s more, given that yields have risen significantly across credit sectors — and that any slowdown in the economy could trigger rate cuts — bonds could be the comeback story of 2024. “Bonds may soon return to their basic roles of offering income and diversification from equity market downturns,” says portfolio manager Oliver Edmunds.


5. There are always reasons not to invest, but markets have been resilient


“In my 25 years in the investment business, I have never known a good time to invest. There are always a dozen good reasons why it makes sense to wait,” said Graham Holloway, the late chairman of American Funds Distributors, a U.S.-based Capital Group affiliate. “Today is no exception … interest rates, the president, constant strife in the Middle East, excessive government regulations and a Congress that is more a part of the problem than part of the solution. A cautious person might be tempted not to invest under those circumstances — unless he wanted to take advantage of an opportunity.”


Those words could have been said yesterday, but they were spoken in May 1981, another time of uncertainty in markets. News drives turbulence in the short term, but company fundamentals drive markets in the long term.


Market disturbances are inevitable and frequent

On a mountain chart representing results for the MSCI All Country World Index, significant historic and market events occurring between January 1987 and 2023 are noted. They include: Black Monday, 1987; Kuwait invasion, 1990; First Gulf War, 1990 to 1991; collapse of the Soviet Union, 1991; 1990s recession, 1990 to 1993; Peso crisis, 1994; Ruble crisis and the collapse of Long-Term Capital Management, 1998; Asian financial crisis, 1998 to 1999; Y2K, 2000; popping of the tech bubble, 2000; September 11 attacks, 2001; SARS and the Second Gulf War, 2003; Avian flu, 2005; global financial crisis, 2008 to 2009; Russian invasion of Crimea, 2014; Brexit vote, 2016; Hong Kong riots, 2019, COVID-19, 2020; post-COVID inflation surge, 2021 to 2022; Russian invasion of Ukraine, 2022 to present; Israel and Hamas war, October 2023 to present. The index value is indexed to 100 on January 1, 1987. The value on December 31, 2023, was 1,712.59.

Sources: MSCI, RIMES. As of December 31, 2023. Data is indexed to 100 on January 1, 1987, based on the MSCI All Country World Index from January 1, 1987, through December 31, 1987, the MSCI World Index with gross returns from January 1, 1988, through December 31, 2000, and the MSCI ACWI with net returns thereafter. Shown on a logarithmic scale. Past results are not predictive of results in future periods. Based in USD.

 



Lawrence Kymisis is an equity portfolio manager with 29 years of investment experience (as of 12/31/2023). He holds a master’s degree in economics from the London School of Economics and a bachelor’s degree in economics & politics from the University of Bristol.

Oliver V. Edmonds is a fixed income portfolio manager with 20 years of experience (as of 12/31/2023). He holds a master’s degree in statistics from the University of California, Los Angeles, and a bachelor’s degree in applied mathematics from the University of California, San Diego.

Mike Gitlin is president and chief executive officer of Capital Group. He is also the chair of the Capital Group Management Committee. Mike has 30 years of investment industry experience (as of 12/31/2023). He holds a bachelor's degree from Colgate University.


Bloomberg U.S. Aggregate Bond Index represents the U.S. investment-grade fixed-rate bond market.

 

MSCI World Index is a free float-adjusted market capitalization-weighted index designed to measure equity market results of developed markets. The index consists of more than 20 developed market country indexes, including the United States.


MSCI All Country World Index (ACWI) is a free float-adjusted market capitalization-weighted index that is designed to measure equity market results in the global developed and emerging markets, consisting of more than 40 developed and emerging market country indexes.

 

The S&P 500 Index is a market capitalization-weighted index based on the results of approximately 500 widely held common stocks.

 

 

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.

Unless otherwise indicated, the investment professionals featured do not manage Capital Group‘s Canadian mutual funds.

References to particular companies or securities, if any, are included for informational or illustrative purposes only and should not be considered as an endorsement by Capital Group. Views expressed regarding a particular company, security, industry or market sector should not be considered an indication of trading intent of any investment funds or current holdings of any investment funds. These views should not be considered as investment advice nor should they be considered a recommendation to buy or sell.

Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. This information is intended to highlight issues and not be comprehensive or to provide advice. For informational purposes only; not intended to provide tax, legal or financial advice. We assume no liability for any inaccurate, delayed or incomplete information, nor for any actions taken in reliance thereon. The information contained herein has been supplied without verification by us and may be subject to change. Capital Group funds are available in Canada through registered dealers. For more information, please consult your financial and tax advisors for your individual situation.

Forward-looking statements are not guarantees of future performance, and actual events and results could differ materially from those expressed or implied in any forward-looking statements made herein. We encourage you to consider these and other factors carefully before making any investment decisions and we urge you to avoid placing undue reliance on forward-looking statements.

The S&P 500 Composite Index (“Index”) is a product of S&P Dow Jones Indices LLC and/or its affiliates and has been licensed for use by Capital Group. Copyright © 2024 S&P Dow Jones Indices LLC, a division of S&P Global, and/or its affiliates. All rights reserved. Redistribution or reproduction in whole or in part are prohibited without written permission of S&P Dow Jones Indices LLC.

FTSE source: London Stock Exchange Group plc and its group undertakings (collectively, the "LSE Group"). © LSE Group 2024. FTSE Russell is a trading name of certain of the LSE Group companies. "FTSE®" is a trade mark of the relevant LSE Group companies and is used by any other LSE Group company under licence. All rights in the FTSE Russell indices or data vest in the relevant LSE Group company which owns the index or the data. Neither LSE Group nor its licensors accept any liability for any errors or omissions in the indices or data and no party may rely on any indices or data contained in this communication. No further distribution of data from the LSE Group is permitted without the relevant LSE Group company's express written consent. The LSE Group does not promote, sponsor or endorse the content of this communication. The index is unmanaged and cannot be invested in directly.

BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). Bloomberg or Bloomberg’s licensors own all proprietary rights in the Bloomberg Indices. Neither Bloomberg nor Bloomberg’s licensors approves or endorses this material, or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith.

MSCI does not approve, review or produce reports published on this site, makes no express or implied warranties or representations and is not liable whatsoever for any data represented. You may not redistribute MSCI data or use it as a basis for other indices or investment products.

Capital believes the software and information from FactSet to be reliable. However, Capital cannot be responsible for inaccuracies, incomplete information or updating of the information furnished by FactSet. The information provided in this report is meant to give you an approximate account of the fund/manager's characteristics for the specified date. This information is not indicative of future Capital investment decisions and is not used as part of our investment decision-making process.

Indices are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment.

All Capital Group trademarks are owned by The Capital Group Companies, Inc. or an affiliated company in Canada, the U.S. and other countries. All other company names mentioned are the property of their respective companies.

Capital Group funds are offered in Canada by Capital International Asset Management (Canada), Inc., part of Capital Group, a global investment management firm originating in Los Angeles, California in 1931. Capital Group manages equity assets through three investment groups. These groups make investment and proxy voting decisions independently. Fixed income investment professionals provide fixed income research and investment management across the Capital organization; however, for securities with equity characteristics, they act solely on behalf of one of the three equity investment groups.

The Capital Group funds offered on this website are available only to Canadian residents.