The economy should continue to grow as inflation subsides, but stock- and bond-market investors can expect greater headwinds…and high interest rates on loans will create plenty of angst for consumers and borrowers. Bottom Line Personal asked our top experts for the best financial moves to make in 2024…
Improve Stock Returns
The Federal Reserve last raised its benchmark short-term interest rate in July 2023 and seems in no hurry to make more hikes. Stocks can do well as long as the economy avoids a recession. Strategies…
Focus on areas of the market that are big winners when the economy reaches “peak” interest rates. I studied data for the six periods over the past 50 years when the Fed stopped tightening and kept rates steady for three months or more. Investors became very positive in those peak-and-plateau periods, and that led certain asset classes to outperform by a wide margin. They include…
Small-cap stocks, which averaged a 27.6% annualized return during those periods. To get diversified exposure: iShares Core S&P Small-Cap ETF (IJR). Recent share price: $108.26.*
Growth stocks of all sizes, which had an average annualized return of 26.3% during peak-and-plateau periods. To get diversified exposure: iShares Russell 3000 ETF (IWV). Recent share price: $273.74.
Derek Horstmeyer, PhD, is professor of finance at George Mason University’s Business School, Fairfax, Virginia. DerekHorstmeyer.com
Invest in property-and-casualty insurers that benefit from catastrophes. Through the first nine months of 2023, the US suffered 23 disasters, ranging from the Maui wildfires to Hurricane Idalia, that caused at least $1 billion in losses. That might seem like a negative for insurers, but the industry is well-capitalized and can handle the storm of claims. In fact, these events allow insurers to charge higher premiums and restrict coverage, which enhances profitability. Commercial insurers have seen the biggest boost, but auto insurers also benefit, dealing with surging auto loss claims as more drivers return to the roads. Look for firms with the strongest balance sheets and the ability to self-fund growth. Two undervalued insurers helped by catastrophes…
W.R. Berkley (WRB) is a specialty insurer that focuses on niche markets ranging from racehorses to cannabis cultivators. The eclectic nature of the policies means that the company generates some of the industry’s best underwriting profit margins. Recent share price: $70.72.
The Travelers Companies (TRV), founded in 1864, is the only property-and-casualty insurer in the Dow Jones Industrial Average. It offers a diversified mix of coverage for midsized businesses and auto owners. US motor vehicle insurance premiums rose 19% in 2023, one of the largest annual increases in nearly half a century. Recent share price: $190.49.
Brett Horn, CFA, is a senior equity analyst specializing in the insurance industry for Morningstar Inc., Chicago, which tracks 621,370 investment offerings. Morningstar.com
Boost Yields
Many investors are sitting on the sidelines in cash and cash alternatives earning payouts in the 5% range. But you can find stable fixed-income investments with better yields. Strategies…
Look for utilities that pay high dividends. Many large regulated companies that offer electricity and natural gas are yielding more than 5%. That dividend payout should continue to rise because the potential for earnings growth is strong. The US electricity infrastructure will grow as the industry transitions from carbon fuels to cleaner alternatives and reinforces the grid against disruptions. As utilities’ assets grow, their profits increase because states allow them to charge enough to earn a percentage of net assets. Also, utility share prices are cheap so there is opportunity for capital appreciation. Stocks worth considering…
For conservative investors: Dominion Energy (D) has made enormous progress selling off assets, paying down debts and simplifying business. About 90% of its earnings come from state-regulated utilities segments. It plans to invest more than $70 billion in decarbonization by 2035, the largest amount of any regulated US utility. Recent yield: 5.67%. Recent share price: $47.
For more aggressive investors: Atlantica Sustainable Infrastructure (AY) owns dozens of energy assets in the US and operates in states such as Arizona and California, as well as in Spain, Algeria, South America and more. The company’s dividend yield is backed by a reliable cash flow from renewable energy and natural gas generation, electricity transmission and water systems. Its stock price has been depressed, but there’s a catalyst—its largest shareholder, the North American utility Algonquin Power, is looking to sell its stake, which would help Atlantica grow faster. Recent yield: 8.21%. Recent share price: $21.50.
Roger Conrad is cofounder of the investment-publishing company Capitalist Times, McLean, Virginia, and editor of Conrad’s Utility Investor newsletter. CapitalistTimes.com
Buy a closed-end muni bond fund. Municipal bonds are exempt from federal tax. They can provide higher after-tax yields than comparable US Treasuries. The best deals are in the closed-end variety, which operate like mutual funds except that they have a fixed number of shares, trade on stock exchanges and use leverage to increase returns. Investors can sometimes pick up these funds at bargain prices because they can trade at a discount to the value of the funds’ underlying holdings. Like long-term US Treasuries, munis were hammered over the past three years, but most of the damage is done, and closed-end funds that hold them are selling at their largest discounts in nearly 20 years. Worth considering…
Nuveen AMT-Free Muni Credit (NVG), which trades at a 14.5% discount and offers a 5.14% yield. 10-year performance: 4.3%.
Nuveen AMT-Free Quality Muni (NEA)—if you are slightly more conservative—trading at a 16% discount with a 4.67% yield. 10-year performance: 3.89%.
Robert M. Brinker, CFS, is editor of Brinker Fixed Income Advisor, Littleton, Colorado. BrinkerAdvisor.com
For Better Consumer Deals
Mortgage and auto-loan rates are high, but if consumers plan, they can save.
Housing…
If you are a seller: You have a solid advantage. Homes have experienced tremendous price increases over the past few years. Inventories are low so you should be able to sell quickly at asking price. Caveat: Make sure the numbers work for purchasing your next residence. Unless you are downsizing, you are likely exchanging a low 30-year fixed mortgage rate for one in the 7.25% to 7.75% range now.
If you stay in your home for a few more years and renovate, focus on projects that offer the highest return—screened-in porches, window replacements and composite deck additions.
If you are a buyer: The market has not been this unaffordable since the 1980s. If you must buy now, plan to refinance in the future—I expect mortgage rates to come down to the 5.5% range over the next few years. On the other hand, putting off a purchase may not hurt your chances of buying a home—US housing prices are expected to rise at a slower pace in 2024. Cash buyers may be able to make an offer below asking price in return for a quick closing date.
Keith Gumbinger is a vice president at HSH Associates, which publishes mortgage and consumer loan information, Riverdale, New Jersey. HSH.com
Autos…
New cars: Put off buying until financing rates fall, or be ready to put down as much cash as possible. The average annual percentage rate (APR) on loans was recently 7.6% for 60 months and average price was $48,760. Luxury vehicles, big SUVs and large trucks sell for $1,000 under manufacturer’s suggested retail price (MSRP), but economy vehicles under $32,000, such as the Ford Maverick and Honda Civic, go for $500 to $700 over MSRP.
Used cars: The glut of EVs means you can purchase a 2021 model year Tesla Model 3 for $35,000 versus $55,000 in September 2022. Other heavily discounted used EVs: Ford Mach-E, Hyundai IONIQ 6, Kia EV6.
Gasoline-powered vehicles: Prices on three-to-four-year-old cars have fallen 6% year-over-year, and they now cost an average of $28,217. The best deals are on three-year-old large- and mid-sized SUVs and trucks.
Ivan Drury is an auto industry analyst and director of insights at the automotive information site Edmunds.com, Santa Monica, California.
