Happy New Year! It’s that time of year when economists and investment professionals engage in the popular ritual of predicting where the economy and markets are headed over the upcoming year. If enough people look into their crystal balls, some of their predictions will prove to be accurate1 .Entering 2023, most economists polled by Reuters expected a recession; economic growth had started to slow as interest rates climbed.
Predicting a recession seemed like a reasonable call at the time, as inflation remained greater than 6% and the Federal Reserve was still planning to raise interest rates to further cool the economy. With the benefit of hindsight, we know the economy continued to expand throughout 2023. In fact, the last government economic report on gross domestic product (GDP) from the third quarter posted one of the biggest increases over the previous decade.
An annual ranking of Wall Street’s top portfolio strategists using a survey administered by Institutional Investor magazine gave the top spot for 2022 to an analyst from Morgan Stanley. In early 2023, this analyst warned that stocks had further to fall following their 18% decline in 2022. He doubled down on that prediction in late October, calling for a stock market decline by year-end. With U.S. stocks up over 25% for the year and the significant rally coming in the last two months of the year, I think it’s safe to say his predictions won’t earn him the top spot for 2023.
Likewise, the expectation of many investment professionals and financial journalists that short-term interest rates would be “higher for longer” seemed to peak in mid-October, as evidenced2 by the yield on a 10-year U.S. Treasury Note reaching its highest level in more than 15 years. A Reuters article from October 18 opened as follows:
“The U.S. Federal Reserve will keep its key interest rate on hold on Nov. 1 and may wait longer than previously thought before cutting it, according to economists in a Reuters poll, as the central bank’s higher-for-longer message gains traction.”
This apparent consensus quickly got turned on its head as several employment, inflation, and Federal Reserve reports suggested the central bank was more likely to lower interest rates than continue to increase them. Since that Reuters article was published, future interest rate expectations have dropped significantly as the 10-year U.S. Treasury Note yield has decreased by more than 1%.
There will never be a shortage of talking heads or journalists in the financial media calling for the next recession or market decline. Those headlines help get clicks and sell ads. A client recently sent me an article titled, “US economist predicts 2024 will bring ‘biggest crash of our lifetime’.” The article quotes analyst Harry Dent as saying, “If I’m right, it is going to be the biggest crash of our lifetime, most of it happening in 2024. You’re going to see it start and be more obvious by May.” That prediction is quite hyperbolic and precise. It’s worth noting this analyst has long been known for very bold stock market predictions that usually have turned out wrong. His Amazon author page refers to him as a bestselling author. He is good at getting clicks. Here is a sample of books he has sold over the last couple of decades in which he documented his predictions:
- He authored “The Next Great Bubble Boom: How to Profit from the Greatest Boom in History: 2006–2010” in 2006. He made a bold upward market prediction for those four years, only to see the Global Financial Crisis take shape a few years later.
- In early 2009, he published “The Great Depression Ahead: How to Prosper in the Crash Following the Greatest Boom in History.” The market hit the bottom a couple of months later and spent most of the next 10 years mostly marching upward.
As you know, Gibson Capital does not think anyone can reliably predict short-term stock market returns and holds the view that devising an investment strategy based on such forecasts is a fool’s game3. Although difficult and without much precision, it is easier to estimate longer term stock market returns. And yet, it’s common for clients and acquaintances to ask for our opinion on where the economy or markets are heading over the next year. We get it. Investors naturally are anxious about market volatility and dream about the allure of timing the markets. So for the first time in Gibson’s history, we are unveiling our 2024 market and economic forecasts:
- 2024 S&P 500 Return: Between +60% and -50% (comfortably above and below the highest and lowest historical calendar-year returns, respectively).
- Likelihood of a U.S. economic recession: Not zero but certainly not 100%.
- Odds that the presidential election significantly influences stock market returns: Smaller than what most people might think.
- Inflation: As measured by the Consumer Price Index (CPI), inflation has decreased over the last few months. The market’s current best estimate4 is that inflation in 2024 will be close to 2%.
- Higher or lower interest rates: According to market-implied expectations5 for rates in 2024, the odds favor the Federal Reserve lowering interest rates by 1% to 1.5% by the end of the year.
Not exactly click-worthy, right?
Since Halloween, every asset class rallied to end the year. U.S. stocks and real estate securities returned more than 15% in the last two months of the year to lead the way. The returns for U.S. small company value stocks and real estate securities during this period each rank as one of the top-five two-month return periods for those asset classes over the last 40 years.
For the full year, investment portfolios saw a reversal of fortunes from their negative returns in 2022 as every asset class experienced positive returns in 2023. With higher interest rates, bonds earned a mid-single-digit return. Real estate securities ended the year in positive territory thanks to their significant recovery over the last couple months. Non-U.S. stocks ended the year with a return in the mid-teens. Higher reinsurance premiums and a relatively benign natural disaster year led insurance-linked securities to be one of the best performing asset classes in 2023. The peak in concerns of an economic recession as forecasted by economists coincided with the bottom of the stock market during the fourth quarter of 2022. The U.S stock market’s returns took off from that point, returning over 25% through the end of 2023.
What’s in store for this year is anyone’s guess. Some market predictions will be entertaining, and some will prove correct but they should not serve as the basis for an investment strategy. Our advice for 2024 is the same as in any other year—take a long-term view and focus your attention on the things that bring you joy rather than on the volatile nature of financial markets.
As always, we look forward to our next conversation and want to express our gratitude for the continued opportunity to work together.
(1) And those people tend to be the loudest after their predictions are proven right!
(2) The yield on intermediate-term U.S. Treasury bonds (e.g., 10-year) is partly determined by the market’s expectation of short-term interest rates over the next decade.
(3) Charles D. Ellis was a consultant to nearly every major financial institution in the world. In his wonderful book, “Investment Policy,” he states: “The evidence on investment managers’ success with market timing is impressive—and overwhelmingly negative.”
(4) The difference in the yield on a 1-Year U.S. Treasury Bill and a 1-Year U.S. Treasury Inflation Protected Security (TIPS) is commonly thought of as the market’s best estimate for inflation over the next 12 months.