2024: The Game Show

Bank failures. Interest rates marching to their highest in a generation. A shaky year for China's economy. Russia's insistence on violence against Ukraine. New violence in the Middle East.

Oof. That must have been hard on stocks.

[Checks notes]

Hmmm. Nope. Things were prrrrretty good, at least in the US.

So, what worked in 2023?

In short: optimism.

I don't mean the pollyannaish "everything is rainbows" type of optimism. More of an "actually, most things aren't going to pot" flavor.

Investors were sour leaving 2022. They’d been beaten up. Crypto, SPACs, big technology all took it on the chin. Volatility is part of the crypto package, but all that volatility was in one direction — down. Lots of companies that went public through SPACs dropped 50% before the ink was dry. A good chunk of those went just about to zero. The Magnificent 7 — Microsoft, Apple, Nvidia, Amazon, Google, Tesla and Meta — dropped an average of 50%. At one point, 100% of economists were predicting a US recession for 2023.

That guaranteed recession? Didn't happen. Far from it. 2023 US economic growth slapped. Growth outpaced inflation by 2.6%. Inflation tumbled, starting the year over 6% and ending the year close to 3%. The job market stayed upbeat. Earnings growth was punchy — up about 13%.

That combination of a downbeat outlook leaving 2022, things being generally good in 2023 and a dusting of hype from artificial intelligence mixed to lift returns. Low expectations were easy to beat.

With a screaming run up to the end of the year, Mr. Market's expectations have risen. That doesn't mean it will tank in 2024. Good years often follow other good years. But the winning games of 2024 probably won't be the same ones as 2023.

Like a contestant on a game show, we investors get to choose which game to play. Some games in the market offer better odds than others. Some offer nicer prizes. Those are the ones we're looking for — the ones that offer the best odds with the biggest prizes.

Deal or No Deal?

Just like going into 2023, or any year, investors have concerns about 2024. Many of those are the same as last year. Some of those worries will be overdone. And, same as always, overdone pessimism can set up investors for nice returns later on.

One corner of the market where pessimism has festered and kept a parade of investment opportunities coming has been in mergers.

But is the merger game a good one to find good odds and big prizes?

The deal market in 2023 was the worst in a decade. Mergers and acquisitions are particularly sensitive to interest rates. Higher rates meant that some deals that penciled-out in better times began to look shakier. New deals looked even tougher. Regulators — the DOJ and FTC — stepped-up their appetite to try and block transactions.

Punishing interest rates and hungry regulators drove a wedge between the price where many deals were struck and the stock price for those companies being acquired. For deals that closed, though, that meant a nice return.

There are good reasons for M&A skepticism. A number of deals fell out. But the big risks have already happened — higher rates and regulatory meddling.

The consequences of those risks happening have been pretty mild. Government objections failed to sink the acquisitions of Activision, Horizon Therapeutics or Seagen. Rising interest rates have made deals for busted biotechs that hold a lot of cash a bit more enticing.

The market has struggled to fully adjust to this new environment. The score points to a game favoring discerning investors and offers tidy payouts, one where investors can find ample opportunities.

Disclaimer: None of this is investment advice. It's meant to illustrate ways LCM thinks about investing. Things that LCM decides are good investments for LCM and its clients are based on many criteria, not all of which are covered here. Some or all of LCM's ideas may not be suitable for other investors. LCM does not recommend investing either long or short any position mentioned. LCM may own positions in some of the companies mentioned. Some of its ideas will lose money — investing entails risk. See full disclaimer here.