The United States Economy
America avoided recession in 2023 but the overall economy slowed down significantly. Inflation that was rampant, declined to nearly 3% by year end. Price pressures across the economy retreated in food, energy, and housing. The labor force remained relatively strong with unemployment stabilizing just below 4%.
It took the majority of 2023 to see light at the end of the tunnel after consecutive rate hikes throughout the year. Inflation should continue to decline or hover around the Federal Reserve Bank’s target of 2%. Sharply higher interest rates drove inflation down as the Federal Reserve Bank raised rates at the fastest pace in history. The Federal Reserve paused rate increases in its last two meetings. A sign that they are most likely done raising rates. Fed Fund futures are now projecting a rate reduction in 2024. In fact, Fed Chairman Jerome Powell finally hinted at future rate cuts in his last post meeting interview.
Financial markets were down in 2022 as they priced in the probability of higher rates in 2023. And while we saw equity markets decline early in the year, the changing interest rate narrative caused the equity markets in 2023 to rebound. Surely, the narrative around future rate cuts sparked confidence in the equity markets as the S&P 500 reached new highs. The tech heavy Nasdaq was up more than 30% in 2023, recovering much of the loss it sustained in 2022.
The Russian War on Ukraine
The Ukrainians have shown great resolve and received tremendous western support early in the conflict. They are winning back territory lost to Russia. However, Putin’s strategy of stringing out the conflict as a method of eroding support from the United States and Europe is working. Voters and policymakers are growing tired of the burden to support Ukraine. Vladimir Putin’s strategy rests on the hope that support from the West is waning because it appears to be an increasingly open-ended commitment. A long war plays to Putin’s strengths. In Russia, the populace is either too afraid to voice opposition or they have accepted the war despite heavy casualties.
For Ukraine, allowing Russia to hold onto territory it has taken is unacceptable. The economic impact of losing most of its southern coast is dramatic. For Russia, the invasion still looks like a failure, because it does not fully control any of the four provinces it annexed in September 2022. Neither country is in a good spot today.
Although the United States started out as the main arms supplier to Ukraine, Europe increased its support in 2023, and has overtaken the US as Ukraine’s largest cumulative supplier of military aid. This is a problem for Europe because depleting its own reserves of tanks, ammunition and missiles will require a ramp up of production in defense. Something they may not be keen to do. We do not think Europe can or will maintain this pace. This portends another challenge for Ukraine’s long-term ability to sustain a defense and mount a takeover of their lost territory.
For Ukraine, the United States may no longer be depended upon to help lead their fight with Russia. New House Speaker Mike Johnson has consistently voted against aiding Ukraine before taking his current position. After assuming the speakership, he has spoken about the need to stop Mr Putin’s imperialist expansion, but his hard right supporters feel otherwise. The parties in Congress continue to debate the need to support Ukraine and it remains an issue fraught with complexity.
Without an open check book from the United States and Europe, what will the Ukrainians do? We think their greatest hope is to speed up integration with the European Union itself. Ukraine was formally accepted as a candidate in June 2022. EU’s leaders should give the green light to the start of detailed negotiations with the hope of a quick resolution. Integrated within the vast European economy, Ukraine will have a chance of holding the line against Russia and outlasting Mr Putin. Having said that, we expect the war to continue throughout 2024.
Israel & Palestine
It’s hard to write about this topic, but to ignore it would miss a significant story line in 2023.
The Middle East is a violent part of the world. It is a place where peace plans go to die. It has an extended history, one far longer than ours here in the United States. The fractures that exist are deep and they persist through generations of religious and territorial machinations.
As terrible as it is to write after so much death, we are hopeful that the region has a real chance of peace. In this information age, the story cannot be ignored because the world is watching.
The war will produce new leaders on both sides. Israel’s prime minister, Benjamin Netanyahu will be forced from office. The catastrophe that took place while he was in charge will end his political career. Meanwhile, Hamas’s leaders are likely to be killed by Israeli forces. New leaders on both sides can and must bring change. Israel’s new leaders must win over traumatized Israelis to the idea of making peace. In the Palestinian territories, new leaders must assuage their people with an acceptance of Israel’s right to exist. A state of permanent and perpetual semi-war is not sustainable. Every war in history has come to an end. So too will this one.
An Arab peacekeeping force is one hope for peace. Arab countries that have closer relations with Israel than in the past (through the Abraham accords) may be able to help. It will be a daunting task as both Israelis and Palestinians are seething with anger toward one another. However, once the fighting ends, international efforts can cautiously begin to build trust again. It will not be easy. It will not be quick. But we are hopeful that it will happen.
We think this war will persist throughout 2024 but an end to the fighting and settlement discussions should emerge by year end.
Crypto Currency
Things can change significantly in one year. Crypto prices were decimated in 2022. This year however, Bitcoin climbed to a two-year high above $40,000, up from just over $16,000 to start 2023. Meanwhile, the industry has seen considerable change. The founders of FTX and Binance await sentencing for financial crimes. As expected, regulators are cracking down on the industry.
Bitcoin has established itself as a serious asset partially because of its technology. It is not a company that can go out of business or shut down. The blockchain technology on which it’s built maintains a database of transactions where they are verified by a decentralized network of computers. Only if the tokens fall to zero does the whole architecture collapse.
There continue to be plenty of reasons to believe in cryptocurrencies and blockchain technology. First, there are plenty of smart developers, many of whom are working on new uses. Second, with each boom-and-bust cycle, it becomes clearer crypto is not a bubble. Finally, the biggest fund managers have applied to launch Exchange Traded Funds (“ETFs”) following a court ruling this year that allowed coins to be held in an ETF.
Although Bitcoin is a volatile asset, its price history looks like many stocks and appears closely correlated with technology stocks. An asset that swings up and down, and not in parallel with other assets in a portfolio, can be a useful diversifier. We are confident Bitcoin is here to stay for the long term.
Artificial Intelligence
There have been four major technological innovations in the last 40 years. The personal computer, the Internet, the smart phone and now; Artificial Intelligence (“AI”). We think the implications and magnitude will cause a seismic shift in the world. It felt like everywhere I turned this year, the topic of Artificial Intelligence was part of the zeitgeist.
“Generative” AI, which can create text and images with basic prompts, and the emergence of “large language models” will materially impact the future. The idea of producing human-like responses to questions has caused a myriad of issues and discussions across topics far and wide.
Launched in 2022, “ChatGPT”, the product developed by the company Open AI, quickly became a sensation. Right away, the company amassed over 100m users. In turn, the investment potential for all manner of AI projects was unleashed. Investors are betting that its use could rapidly drive innovations.
Engineers of artificial intelligence see the tool in different ways. Some want to create superhuman intelligence to improve daily life. They see AI’s transformative promise while others see extreme AI risk and a backlash against its own creators.
Numerous viewpoints exist on AI. One analogy that comes to mind is that AI is like a survivalist knife. In the hands of some, it’s a tool. In the hands of bad actors, it’s a weapon. As such, we expect guidance and regulations to take shape as AI technology continues its inevitable diaspora through life as we know it.
Investment Themes in The World Ahead
We continue to believe that a diversified portfolio of equities, fixed income and alternatives are the right way to allocate assets in an ever-changing world.
As equity markets rebounded this year from big declines in 2022, we are cautiously optimistic about US equities in 2024. We will focus on high dividend paying companies with strong balance sheets and strong defensible businesses. Additionally, we continue to believe in growth stocks and technology names as many of these companies adopt plans to benefit from the emergence of artificial intelligence. We are in the early innings of this trend.
In fixed income, investors were finally getting paid with a yield on cash and short term government instruments. But rates are likely to have peaked. After crossing above 4%, the 10 year US Treasury is back below 4% and will likely stay there in 2024. We expect high interest rates on the front end of the yield curve to begin their assent downward as the inverted yield curve retreats over the next 12 months.
In alternatives, for qualified investors whose time horizon and liquidity permit an allocation, we continue to like venture capital and private equity as alternatives to public equity. As interest rates move, we also favor private credit and dividend yield real estate opportunities as another means of getting income.
Manhattan West in 2024
As we enter our 8th year in business, we are excited for another year of growth. We added new Financial Advisors, Business Managers and Tax Professionals in 2023 and we added many new clients in each segment. Each unit showed impressive results as we worked to be our client’s most trusted advisor.
Our focus in 2024 will be to increase our technology stack to make it easier for clients to view their investments with us. We will continue to add Financial Advisors, Tax Professionals and Business Managers in order to build and improve our “private client ecosystem” for the benefit of our clients.
To those who have done business with Manhattan West, we are grateful for you! We look forward to a prosperous 2024 and we wish you all a happy and safe new year.
With kindest regards,
Lorenzo Esparza
CEO/Founding Principal
