We are convinced that the market is experiencing a massive upheaval due to a shift from high inflation to an unexpected period of deflation. Consequently, we anticipate that the stocks hit hardest in recent years will likely be the biggest winners in 2024. In this article, we will delve deeper into the major market disruption underway and offer our perspective on how to best invest $100,000 for 2024.
Understanding the Major Market Disruption
For the first time in years, the U.S. is witnessing deflation in sectors that were previously inflation hotspots. The trend is notably evident in items such as appliances, furniture, and used cars, with recent data from the Commerce Department revealing a year-over-year drop in durable goods prices, a clear departure from the high inflation rates of the past two years.
Additionally, my colleague Austin Rogers recently wrote about the concept of the “Five Horsemen of Deflation” rearing their heads:
- Demographics (aging populations and declining birth rates)
- Technology (with its labor-saving and productivity enhancements)
- Over-indebtedness (high debt levels impeding economic growth)
- Globalization (international trade exerting downward pressure on prices)
- Inequality (reducing aggregate demand due to wealth disparities).
These major societal and macroeconomic trends should exert significant deflationary pressures on the economy in the coming years, adding further weight to the current deflationary trend.
Ultimately, we believe that the Federal Reserve will be the decisive force in determining the extent of the swing from four decade-high inflation towards potential deflation. Over the past two years, the Fed has implemented a series of rate hikes at a pace not seen since the 1980s. While these measures have successfully reduced inflation, they have also raised concerns about the potential for deflation. For example, the PCE price index – the Fed’s preferred index for measuring inflation – has plummeted over the past three months to 0.00% in its most recent reading.
If this trend continues, we will be in a deflationary environment very soon. Just a few months prior, the markets were fully expecting interest rates to remain higher for longer and leading business leaders were calling for long-term interest rates to rise to levels as high as 6-7% potentially. This caused the market to panic. However, this rapidly swinging sentiment back towards fears of deflation and the expectation that the Fed will have to scramble to cut interest rates in response is driving a major market disruption.
This market disruption is evident in the recent performance of AI-related tech companies, which have soared while defensive and interest rate-sensitive stocks like utilities and REITs have lagged. However, with the economy showing signs of cooling and potential shifts in the interest rates on the horizon, a reversal in this trend is clearly underway.
In a deflationary environment, certain asset classes are favored over others. Sectors with stable, contractual cash flows, such as certain REITs and utilities, could become more attractive. The potential for a market correction also suggests that investments in overvalued sectors, like certain tech stocks, might need to be reassessed.
We will dedicate the rest of this article to discussing some specific ways that we are preparing our portfolio to profit in 2024.
How To Invest $100,000 For 2024
As we have discussed in the past, the late Charlie Munger believed that the first major step to achieving financial independence was amassing an investment portfolio of at least $100,000. This milestone is important to reach because – while you won’t earn much passive income from your investments early on – once your savings reach a certain size, the passive income you earn becomes quite large and your nest egg begins to compound rapidly.