If you look at enough of the charts, you can see that the preponderance of evidence points to an increasing amount of positive economic and market news for 2024. Image courtesy of Worldoflard via Flickr.
2023 lacked clarity. Will there be a recession or not? Will inflation ever be under control? Can the stock market continue to rise if a select number of mega-cap stocks are driving it? Let’s consider the charts and charts that have defined the markets for 2023 with the expectation that they will provide some insight into what to expect in 2024.
The federal funds rate
The Fed raised interest rates from effectively zero percent in 2022 to 4.25 percent in 2022. The Fed added one additional percentage point in 2023, apparently ending its interest rate hike campaign in July 2023.
Economic inflation
The Consumer Price Index (CPI) is the most popular measure of inflation in the United States. The reason the Fed raised interest rates was to break the back of high inflation. The CPI reached 9.1 percent in June 2022, and continued until 2023 at more than six percent. Inflation, while still high, is on a lower path, and it looks as if the Fed will be reasonably close to meeting its 2% target by the end of 2024.
US GDP growth rate
I can’t get anyone to agree that the US went through a recession in the first half of 2022 despite two straight quarters of negative GDP growth. Far from it, the Fed intended to raise interest rates enough to push the US economy closer to the recession defined by the National Bureau of Economic Research. Despite the efforts of the Federal Reserve, the US economy registered growth. Despite numerous indicators pointing to a contraction in 2024, there are increasing reasons to expect the economy to perform well next year.
Unemployment rate
Many people have experienced a personal recession in 2023. Fortunately, most people who wanted a job were able to get one. The United States was a job creation machine last year. In 2023, there was a significant decline compared to 2022, but there appears to be enough interest in recruitment to support the hiring of most job entrants by 2024.
Banking crisis
On Friday, March 10, 2023, Silicon Valley Bank suffered a bank bankruptcy, forcing the Federal Deposit Insurance Corporation (FDIC) to close it. It seems that the depositors were in a state of tension. On Sunday, March 12, 2023, regulators shut down New York-based Signature Bank due to a run on deposits. Together these were the second and third largest bank closures in history (after the 2008 closure of Washington Mutual Bank). Then, on May 1, 2023, First Republic Bank said, “Hold my beer,” and became the second-largest failed bank in U.S. history. These bank failures may have been the balls that hit other banking pins, sparking a series of failed banks. However, the Fed learned from the great financial crisis of 2008 and provided deposit guarantees that impeded further bank runs.
Big caps versus small caps
The so-called Magnificent Seven stocks (the seven largest companies in the S&P 500 stock index) have received a lot of attention to fuel the index’s rise in 2023. As investors put money into mega-cap stocks, smaller companies haven’t been able to hold it higher. Fundamentally, small businesses should continue to struggle in 2024 as their profit margins face higher financing costs than in recent periods. However, technically, small-cap stocks are on the rise because they may get some relief from a more dovish Fed.
Mortgage rates
U.S. mortgage rates were 18% in 1981. By comparison, mortgage rates of 8% in 2023 are moderate. But it’s hard to be complacent about a decades-old comparison when, just two years ago, homeowners were paying less than three percent. Historically, the interest rate on a 30-year fixed mortgage has been less than 2% over a 10-year Treasury bond. Mortgage rates have retreated from their recent highs and should trend lower in 2024.
House prices
It goes without saying that higher mortgage rates will lead to lower home prices in 2024 due to lower affordability. However, the supply of homes for sale declined dramatically because homeowners with mortgage rates below 5% did not want to switch to more expensive loans. As a result, housing prices have retreated from their peak but remain stubbornly high. As mortgage rates decline, it is possible that more homes will be available for sale, resulting in lower prices in select areas of the United States
The bond market is hitting rock bottom
Traditionally, investors looking for safety put their money in bonds. In 2023, holders of Treasury securities were penalized for so-called “safety.” This safety trade should do better in 2024, as the Fed will likely have finished raising interest rates in July 2023. Below, you can see the performance of some popular Treasury investments. For investors looking for a greater level of security in terms of capital return, individual Treasury securities are an effective tool for controlling funds.
Money market financing
Understandably, money market funds have been a hot investment in 2023. Investors have flocked to high-yield, stable-value funds to protect their investments from a potential recession. If the Fed cuts interest rates in 2024, as expected, the returns on these instruments will follow suit. Investors will likely find a new home for that cash, with some of it flowing into low-volatility stocks that pay dividends when the market is flat. Then some cash will flow into higher growth options as those dollars chase performance.
History doesn’t always repeat itself, at least not right away. Often, reversion to the mean occurs. It’s hard to look back to determine what will happen after the calendar page turns. But if you look at enough charts (and there are a lot of charts you can draw information from), you can see that the preponderance of evidence points to an increasing amount of positive economic and market news for 2024.
Allen Harris is the owner of Berkshire Money Management in Dalton, Massachusetts, managing more than $700 million in investments. Unless specifically identified as original research or data collection, some or all of the data cited is attributable to external sources. Unless otherwise stated, any mention of specific securities or investments is for illustrative purposes only. The Adviser’s clients may or may not hold the securities discussed in their portfolios. The Advisor makes no assurances that any of the securities discussed have been or will be profitable. Full disclosures here. Direct inquiries to Allen at [email protected].
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