Predicting where the nation’s economy is headed in 2024 and devising investment strategies therein often has been called a fool’s game. Yet, there is no shortage of those willing to play.
We all want to know where interest rates are headed, will inflation ultimately be tamed, will the job market and employment numbers stay strong, what effect does an election year have on the economy? And, most important, what does it all mean for me?
What’s made economic predictions more difficult in recent years is that the economy has not behaved as expected. Jobs and payrolls have increased despite runaway inflation – normally the opposite would be the case. The central bank’s “soft landing,” in which prices and GDP numbers are suppressed without pushing the country into recession, seems within the Fed’s grasp. However, the Fed’s chairman, Jerome Powell, consistently says he isn’t ready to declare victory and its goal of 2% growth continues to be elusive.
So, what’s an investor to do? Theories abound.
Investment Policy Statement advised
“Long-term investors should establish an Investment Policy Statement and follow it,” says Robert Johnson, chairman and CEO of Economic Index Associates and professor of finance, Heider College of Business at Creighton University “Investors should not concern themselves with broad market moves, the crisis du jour, or current economic conditions.”
An IPS, Johnson said, is a written document that clearly sets out a client’s return objectives and risk tolerance over a relevant time horizon, along with applicable constraints such as liquidity needs and tax circumstances.
“In essence, an IPS sets out the ground rules of the investment process – it is the document that guides the investment plan,” Johnson adds. “And it is best to develop an IPS in a rather calm market.”
If there’s any consensus among economists and Fed watchers is that interest rates will remain at their current record high levels in the near term but probably will begin coming down toward the end of 2024.
The CME Group compiles the view on interest rates via its Fed Watch Tool based on Fed Funds futures contract prices. Currently, according to the CME’s FedWatch Tool, the benchmark target Fed funds rate is expected to be about 150 basis points lower in December 2024 than it is today.
“If one believes that interest rates are going to fall, that would be a tailwind for stocks,” Johnson said.
Johnson and his partners found that from 1966 through 2020, the S&P 500 returned 16.5% during expansive monetary conditions (when Federal interest rates were falling), 11.6% during indeterminate periods (when Federal rates were neither rising nor falling) and 6.2% during restrictive monetary periods (when Federal Reserve rates were rising).
Interest rates likely will remain high
Interest rates on credit cards, mortgages, car loans and other instruments will remain high in the short term, but that’s not all a bad thing.
“The Fed’s more dovish posture outlined in its minutes has already helped send mortgage rates lower,” said Robert Frick, corporate economist with Navy Federal Credit Union. “Also, this means more time to lock in higher savings rates on everything from CDs to treasuries.”
Frick notes that the housing market is virtually frozen, due to high mortgage rates and home prices. But, he says, a thaw will start in 2024, as rates likely fall below 6%.
“Unfortunately, the country has a deficit of at least four million homes, and many homeowners refinanced at rates around 3%” he said. “Both those factors will keep home sales subdued. In addition, high home prices are unlikely to fall by much, if at all, meaning housing affordability will continue to be a challenge.”
Inflation will also remain a thorny issue, he says, predicting the levels will remain tenacious and fall slowly from around 3% but unlikely to hit the Fed’s 2% goal this year.
“This is mainly because shelter costs and certain services costs will continue to be sticky,” Frick said. “And while the rate of inflation has fallen, the weight of inflation will continue to rise because prices have mostly continued to increase, especially for necessities like food and transportation.”
A slowdown in jobs?
The mass movement of workers back into the labor force – especially into healthcare, leisure and hospitality, and government – that marked 2023 will slow significantly in 2024, Frick believes. Instead, we’ll see a more normal jobs market, with around 120,000 to 150,000 jobs added monthly, typical of an economy in slow but steady expansion.”
The experts, however, were caught a bit off guard by Friday’s job report that found the economy added a whopping 216,000 jobs in December, far surpassing expectations and further rebuking thoughts of a coming recession.
“The labor market continued to flex its muscles in December, “ said Dan North, senior economist with Allianz Trade Americas. “However, there were several items that made the report a bit less strong than the headlines suggest. Job gains over the previous two months were revised down a substantial 71k, and the participation took a breathtaking drop from 62.8% down to 62.5%. Most importantly, however, wages came in hotter than expected at 4.1% vs. expectations of 3.9%. That keeps pressure on inflation and pushes back on anticipated Fed cuts later in 2024.”
But others say the one-month figures won’t disrupt expectations.
“I am baffled by how much market commentators react to singular data pieces – like [the] announcement of stronger than expected job growth,” says Johnson. “Those stating that the numbers indicate that the Fed will be reluctant to lower rates in 2024 are misguided, in my opinion. One piece of data does not a trend make. To paraphrase Mark Twain, “the reports of the death of Fed easing are greatly exaggerated.”
A good news/bad news story for equities
On the equities market front, it’s a good news, bad news story. The markets surged during the last two months of 2023, as optimism about potential Fed rate cuts proliferated.
The result was that a good year for equity markets quickly turned into a great year for equity markets, “ said John Lynch, chief investment officer at Comerica Wealth Management.
And the gains for investors were not isolated to the stock market as an “everything rally” boosted bonds and gold, too.
“We get paid to worry, and for all the undeniable technical momentum supporting the financial markets, ‘everything’ is not supposed to rally simultaneously,” said Lynch. “We struggle to reconcile market expectations for six rate cuts with the combination of consensus projections for growth in GDP, sales and corporate profits. Three cuts seem more likely to us.”
Consequently, Lynch said, he looks for slightly higher market multiples to support equity prices in the year ahead, with the S&P 500 Index fairly valued in the range of 5,200 by year’s end, from its current level around 4,600.
“Two of Wall Street’s great adages are: 1) Don’t fight the Fed and 2) Don’t fight the trend,” he said. “In the current environment, both are formidable forces.”
Indeed, despite many positive signs, consumers haven’t really been convinced things are getting better. A recent Q4 Quarterly Market Perceptions Study from Allianz Life Insurance Company of North America found only 47% of Americans think the economy will improve in 2024. About 55% said they are keeping more money in high-yield savings accounts or money market funds because of interest rates. And 67% said in the past three months, prices are still too high, and they are struggling to stay afloat.
What effect this might have on this year’s elections is anybody’s guess.
Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at firstname.lastname@example.org.
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