No economist or market watcher has a crystal ball. So, when making predictions for the coming year, many take a conservative stance, cautiously making their bull or bear case.
However, over the past two years, investors have remained unsettled. In 2022, investors sold stocks as the Federal Reserve introduced an unprecedented rate hike in an attempt to control sky-high inflation, resulting in an 18% decline in the S&P 500 index.
This year is very favorable for the markets. Slower inflation is an encouraging sign that the central bank can engineer a so-called „soft landing.” Investors responded by sending the S&P up 25% this year in less than two weeks.
What do market strategists say about the coming year?
With the Fed expected to cut interest rates in 2024, many are predicting a strong year for the economy and stock market, but some are more sanguine than others.
Don’t expect a slowdown, but don’t expect things to go completely smoothly, says Christina Hooper, chief global market strategist at Invesco. She calls for a „flat landing.”
„It’s recognizing that in a soft landing, there’s no real damage. I think there will be some damage to the economy,” he says. Given how much and how quickly interest rates have risen, „it’s hard not to do some damage,” he adds.
Nevertheless, he ultimately expects markets and the economy to move upwards in 2024, a sentiment shared by Jay Hatfield, CEO of investment firm Infrastructure Capital Advisors.
The latest economic data „confirms our theory that 2024 will be a year of rate cuts, and that’s very favorable for stocks,” he says. He says a fall in rates globally would make for a good year for markets and a recession would be less likely. „So, we’re as strong as we’re ever going to be.”
The current economy is not a picture of health. Persistent inflation has put a strain on consumer budgets. „We’re already seeing consumers become more selective in their purchases. This has come through a lot of earnings calls,” says Hooper.
Hooper points to a pick-up in bankruptcies in 2023 and 2022, which he sees extending into next year. „We can see some companies, especially smaller companies, having difficulty getting financing,” he says.
We could also see a slight rise in unemployment as businesses continue to digest the Fed’s rate regime – which Hooper says could have a knock-on effect on the economy.
These are all „very natural” areas, he says, of what happens when the Fed raises interest rates the way they did. He expects any recession in early 2024 to be „relatively brief” with „some real acceleration and growth later in the year”.
One factor reinforcing Hatfield’s view that a recession is not on the horizon: the housing market. „Almost every recession since WWII has been characterized by a housing crash, but here we have a housing shortage,” Hatfield says. „So the possibility of a recession is remote in our view.”
In short, Hatfield expects low interest rates to make it easier for companies worldwide to get financing and do business. Coupled with a resilient US economy and the continued rise of artificial intelligence, markets will find themselves on an upward trajectory in 2024, he says.
Financial advisors generally caution against making wholesale changes to your portfolio based on expected short-term movements in the market. However, this may be a time to rebalance your portfolio by shedding some money from your winning positions and adding some trailing positions.
Hatfield expects a big year for stocks in the real estate and financials sectors, both of which had tough years in 2022 and haven’t returned as high as the broader market so far in 2023.
Likewise, Hooper says, shift some of your holdings away from large, fast-growing U.S. companies and into smaller-company stocks and emerging-market names that he sees as beneficiaries of a broad-based economic acceleration.
But especially for younger investors, Hooper says, trying to figure out what will happen in the market in the coming year is far less important than absorbing the lessons of market history and sticking to your long-term plans.
„It’s hard to know what will happen. When we started 2022, we didn’t expect the central bank to raise rates, and we weren’t prepared for annual atrocities like this,” he says. „We had a nice recovery in 2023. We hope to remind readers that it’s important to continue studying.”
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