Investment trends to watch in 2024

With inflation down, interest rates likely to ease and a recession still elusive, the economic backdrop has improved heading into the new year. Both stock and bond investors have counted some gains of late, while savers are earning higher yields on deposit accounts.

Will it continue in the new year, especially with a rancorous presidential election on tap? Here are four investment trends or developments to watch.

Bonds emerging as backstops again

When the Federal Reserve started to push up interest rates to curtail inflation a couple of years ago, bond prices took it on the chin as the two move inversely. Bonds and bond funds often serve as less-volatile complements to stocks as part of a balanced portfolio. But when rates are rising, bond prices can get hit hard, too, as happened in 2022.

That appears to be changing, with interest rates starting to ease. If bond prices start rising in value as rates fall, that will generate capital-gain profits for investors. In the meantime, bonds are paying much higher yields than a few years ago.

If bonds truly are back, that will rekindle enthusiasm for balanced portfolios, such as the standard 60-40 split, where investors put 60% or so of their holdings in stocks and stock funds and the remaining 40% in bonds and bond funds. This mix would have generated a respectable 6.4% average annual return from 1901 through 2022, according to a Vanguard report. Vanguard's strategists view today's higher bond yields as a favorable development for investors, most of whom can't tolerate the white-knuckles ride of putting everything into the stock market.

Higher deposit yields could fade

The Fed has moved aggressively to tamp down inflation by pushing up interest rates. Certificates of deposit, money market funds and other low-risk accounts have seen their yields swell to the delight of savers. But today's yields might not last for long if the Fed eventually starts cutting rates.

“With rates set to fall (albeit not as low as they were over the past 15 years or so), strategists agree that investors can find better ways to put their cash to work this year,” said researcher Morningstar in a recent analysis.

Greg McBride, chief financial analyst at Bankrate.com, sees payouts on deposit accounts falling gradually over the course of the year. He expects top-yielding savings accounts to end 2024 with average yields of 4.45%, which would represent a drop from around 5.35% currently.

More to the point, cash accounts aren't great places to hold lots of money over the long haul. Most people need some highly secure deposits, but the returns on these instruments lag over time.

More stocks could join the rally

The stock market logged a strong overall return in 2023 but breadth was narrow, meaning that a few giant companies accounted for most of the gains. "The 'Magnificent Seven' mega-cap tech stocks drove the lion’s share of gains … amid a surge of enthusiasm surrounding artificial intelligence,” Morningstar noted, predicting that the trend "will fade somewhat in 2024.”

Those seven technology heavyweights are Google parent Alphabet, along with Amazon, Apple, Facebook parent Meta, Microsoft, Nvidia and Tesla.

Using a slightly different measure, J.P. Morgan Asset Management found that the 10 most valuable corporations in the Standard & Poor’s 500 index (including most of the same seven tech giants) accounted for 86% of the index’s overall return last year. That means the other 490 companies generated only 14% of the return. Those top 10 now account for 32% of the total value of the S&P 500, compared to a more normal weighting of around 20%.

A broader market would be a healthier one, and it might come in 2024, especially since the top seven or 10 stocks have much loftier valuations that could dissipate over time. Look for other stocks to gain ground, including those outside of the technology sphere.

Election likely won't rattle investors

The presidential and congressional elections scheduled for November could emerge as some of the most divisive ever. But that doesn't mean they will sink the stock market.

Despite pervasive gloom, much of it rooted in politics, presidential elections tend to coincide with investor optimism (though years like 2023 that precede election years tend to be even better).

"The S&P 500 has generated an average gain of 7% during presidential election years dating back to the 1952 election," wrote Jeff Buchbinder, chief equity strategist at LPL Financial in a report. "That’s a far cry from the average gain in year three (in the presidential election cycle) of nearly 17%, but it should help calm fears that the election might derail the bull market."

This pattern doesn't hold all of the time — the stock market sustained sharp losses in 2000 and especially 2008, for example. But the long-term pattern points to stability if not higher prices, even when everyone seems to be grumbling about their political opponents.