It's been a tough couple of years for stock investors. The market's been erratic since early 2022, caused in part by the Federal Reserve, which raised interest rates from near zero to above 5%. It was trying to tame an inflationary surge above 8%, something that retirees and older workers haven't seen in this century. It wasn't good.
At the same time, TV experts delivered near-daily forecasts that the economy and Wall Street together faced financial collapse. Unfortunately, while such punditry does a lot for TV ratings, it just scares many investors.
However, there are still money making opportunities over the new year. First, the interest rate hikes may nearly be over. "The Fed signaled that it believes interest rates have gone up enough," says Steve Blitz, chief U.S. economist at multinational financial analytics company GlobalData TS Lombard.
According to a recent Wall Street Journal survey of economists, inflation should dip in 2024 to around 2.4%, down from a peak above 8% in 2022. They also forecast interest rates will ease to 4%, far below the 5.5% seen in October. These same experts think the economy will grow in the first half of 2024.
Of course, forecasting is always hard, especially given the political and economic volatility. And if interest rates continue to rise, we could be in for a global slowdown, or worse. With those caveats aside, here are four sectors that investors might want to consider for the new year.
Stock picks for 2024: Japan
The first is Japanese stocks. "There are as many stocks listed in Japan as are listed in America, but Japanese stocks are really cheap by comparison," says Dan Rasmussen, a partner at Boston-based asset management company Verdad Advisers. On average, Japanese stocks are priced at 14 times their forecast net profits per share, according to stock research company Yardeni Research. That compares to 18 times earnings for U.S. stocks.
Part of the reason Japanese stocks are a relative bargain is that they haven't moved above their record high reached more than 30 years ago. The Nikkei 225 Index, Japan's equivalent of the Dow Jones Industrial Average, remains below its peak, made back in December 1989. Like the old song says, "been down so long it looks like up to me."
Today, Japanese executives are taking shareholders' interests more seriously than they have in the past. In March, the Tokyo Stock Exchange ordered Japanese companies with ultra-low share prices to get them higher. "What works is to increase cash dividends and stock buybacks," Rasmussen says. Buybacks reduce the number of shares outstanding, increasing earnings per share; in turn, that leads to higher share prices. It's worked, and this year through mid-October, the Nikkei 225 gained 25%. But the index is still below its 1989 record level.
Among Japanese securities available on U.S. exchanges, Rasmussen likes automakers Honda (HMC) and Toyota (TM). He says they are trading at eight and 17 times forecast earnings, respectively. Toyota is far ahead of Honda in the development of electric vehicles, which explains the premium valuation, he says. He also likes semiconductor manufacturer Tokyo Electron (TOELY), which should benefit from the artificial intelligence revolution. It trades at a high multiple of 27 times forward earnings.
Alternatively, investors could buy a fund such as the iShares MSCI Japan (EWJ) exchange-traded fund, which tracks a large basket of Japanese listed companies.
Stock picks for 2024: energy
Energy stocks are also worth a look. Just as corporate Japan has changed its ways, so have America's energy companies. For most of the energy industry's history, there were repetitive boom-then-bust cycles, which hurt shareholders as executives would spend massively on more production during the good times. In turn, the increased supply sent prices back to rock bottom. It wasn't good for investors, who suffered as energy prices dropped precipitately.
Then in the last decade, investors acted. "They refused to invest after the last bust," says Art Hogan, chief market strategist at wealth manager B. Riley Financial. Instead, Wall Street demanded investors get steady dividends and that companies commit to large stock buybacks. "Now we have a more conservative approach focused on return of cash to investors," Hogan says. And energy companies aren't increasing their output as much as they used to.
At the same time, the Organization of Petroleum Exporting Countries and Russia (OPEC+) have cut output as the economy has slowed. The cuts have helped keep prices elevated despite slowing the world economy.
Hogan names three stocks to consider, all on B. Riley's focus list. First comes Exxon Mobil (XOM) because it's a well-run energy company with a healthy 3.3% dividend and has production, refining and distribution arms. He also likes Devon Energy (DVN). "It's not overspending," he says. Finally, there's liquefied natural gas company Cheniere Energy (LNG). "It's going to be one of the largest producers of LNG," he says. Alternatively, investors could consider an energy company index fund such as the Energy Select Sector SPDR ETF (XLE).
Stock picks for 2024: homebuilders
The recent stalling of the housing market is due to the increased cost of home loans, says Ana Garcia, a homebuilding analyst at CFRA Research, an investing research and analytics firm. But that's likely a temporary issue.
There are two attractive factors in play: an expected decline in interest rates and pent-up demand for a limited supply of properties.
"We believe interest rates will come down sooner rather than later," says Garcia. The Federal Reserve has already signaled an extended pause in rate rises. And if the new year sees them start falling, homes will be more affordable, especially for the all-important first-time home buyers.
Separately, the demand for homes is far ahead of the supply. Shortages could be as high as 6.8 million housing units, according to the National Association of Realtors. Builders will need to offer the right buildings at the right prices in the right places, says Garcia, and currently that means entry-level smaller houses with lower prices.
Garcia likes PulteGroup (PHM), D.R. Horton (DHI) and Lennar (LEN). Index investors might consider the SPDR S&P Homebuilders ETF (XHB), which tracks the sector.
Stock picks for 2024: defense and aerospace
It should be clear to anyone watching the news that tension between countries has risen over the past few years. Governments all over the world are beefing up their defense capabilities.
"There is a lot of concern about China's growing military confidence," says Jay Van Sciver, a partner at research firm Hedgeye. He says the two-decade war on terror focused less on heavy armaments – so-called "consumables" such as bullets, grenades and tactical gear – but now the focus is on big-ticket capital equipment such as fighter jets and aircraft carriers. "We are in the position where these platforms are 40 or 50 years old and now need to be refurbished or replaced," Sciver says.
Most of the buying action will come from other countries, not the U.S., says Sciver. He likes Huntington Ingalls Industries (HII), a shipbuilding company that also produces water-based drones, along with broad-based defense giants General Dynamics (GD) and RTX (RTX). Index investors might want to consider the iShares U.S. Aerospace & Defense ETF (ITA), which tracks a basket of stocks in the sector.
Note: This item first appeared in Kiplinger Retirement Report, our popular monthly periodical that covers key concerns of affluent older Americans who are retired or preparing for retirement. Subscribe for retirement advice that's right on the money.
