2024 Economic Outlook Recap and Quilt

2024 Economic Outlook Recap and Quilt

January 30, 2024

We just completed our 16th Annual Economic Outlook Breakfast.

It’s always my favorite event of the year because we get to connect with clients and friends. Of course, we also get to talk about investments and the economy!

Today, I’ll give you a recap of the main points we shared by taking a brief look back at 2023 and then we’ll see what the current data is telling us as we begin 2024.

Returning for his fourth appearance as our special guest was Chris Shuba, Founder, CEO, and Chief Quant Nerd at Helios Quantitative Research.

If you’ve been to one of our breakfasts before, you know we don’t make predictions. The real risks we’ll face are very likely the ones no one is thinking about right now.

But we can take an unemotional look at the data and put that in context for the year ahead.

Let’s start with a review of our favorite and most popular piece, our Asset Class Returns Quilt for 2024.

2024 Asset Class Returns Quilt - Download here

For those of you that haven’t seen this chart, we rank the best performing asset class for each of the last 15 years at the top, down to the worst performing asset class at the bottom. The grey box is a sample mix of most of those asset classes representing a globally diversified portfolio of 60% stocks and 40% bonds.

You can see that for 2023, all asset classes, except for commodities, had a positive return for the year.

This is after most asset classes had negative performance in 2022.

Notably, after a strong end of year, bonds finished with a positive 5.5% return - avoiding what would have been an unprecedented 3 straight years of negative returns.

The beauty of this chart is that if you’re looking for a pattern as to what asset class will do best in 2024…good luck, there isn’t any. This is why we have the grey diversified portfolio box. Combining the asset classes in a disciplined data-driven way delivered excellent returns especially relative to risk, which is why the diversified portfolio has never been at the top but it’s also never at the bottom. It also finished the period with the fourth highest return and the third lowest risk of all the asset classes.

Economic

As we look back on 2023, there was quite a bit of concern coming into the year about the US economy.

The consensus among economists was for a recession in the first half of the year. Inflation was to remain elevated, and the unemployment rate was to rise as companies pulled back on their workforce.

Even the world-famous economist CARDI B warned her 33 million Twitter followers that a recession was imminent.

 

Instead…

  • The US Consumer price index (the broadest measure of inflation) dropped from 6.5% to 3.35%.
  • The US Unemployment rate ended the year effectively where it began. Up slightly from 3.5 to 3.7%
  • The US economy grew all year on a quarter-over-quarter basis and accelerated to almost a 5% growth rate in the third quarter (GDP). Since our event, fourth quarter GDP was released and came in above expectations at 3.3%.
  • The US housing market didn’t crash as many predicted. The Case Shiller National Home Price Index hit an all-time high even with 30-year mortgage rates peaking at 7.79% at the end of October.

The economy moved forward even though the Federal Reserve hiked rates an additional four times throughout the year adding another 1% to their target rate.

Looking Ahead

As we look ahead to 2024, Chris shared some key insights and slides. He said you really don’t even have to watch your portfolio this year. Just watch inflation, the Fed, and employment.

If inflation stays in check and continues its path toward the Fed’s 2% target, AND employment remains robust, THEN risk assets should have a pretty good year.

Inflation

This is such a great slide as it breaks down the components of inflation between Energy, Food, Goods, and Services.

The rate of growth in all components of inflation has moderated from their peak in June of 2022. Notably, services have been much stickier. This includes transportation, shelter, and medical services. Energy costs have been coming down and have been in a deflationary trend since early 2023.

The Fed

In December, we finally got the long-awaited Fed pivot, where Fed Chair Jerome Powell said everything but “mission accomplished” on the war against inflation. And, indicated three rate cuts in 2024.

Here, we look at market expectations for future Fed funds rates. Currently, there is a 94.8% chance the Fed will keep rates unchanged at the 5.25-5.5% level.

In March, markets are pricing in an 80% chance of a rate cut of at least ¼ of a percent. This would be the first cut since the Fed began its inflation fighting rate hiking campaign in March of 22. All-in the market is expecting 5 rate cuts between March and September.

We saw the market celebrate this news in the last two months of the year with both stocks and bonds rallying sharply. The question is, how will the market react if the Fed is less aggressive in their actual rate cuts than those being expected? The futures market looks to be expecting more cuts than the Fed has indicated.

We’ll likely be in for a wild ride as we receive reports on inflation, the health of the economy, and the Fed’s response to that data.

Recession Watch

Will we continue to be on recession watch this year? Yes, we always are, but the US economy has continued to surprise to the upside.

These are the six economic components the National Bureau of Economic Research uses to track the US economy to determine if we are in a recession. The NBER defines a recession as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators.”

You can see as of the November readings all but one of the indicators was positive.

The consumer is still strong. Last week we got the retail sales numbers for December which were also better than expected.

Final Thoughts

Retail investors poured $700 billion dollars into money market funds between July 2022 and the end of 2023. Much of this really is just depositors moving their savings, emergency funds, and retirement cash reserves out of banks and into greener pastures. But, make no mistake, plenty of these funds are long-term dollars that are not being deployed efficiently.

Why is this? Because money is emotional, and cash feels safe. But it’s hard to see the impact inflation has on a large allocation to cash in any year. Inflation is the silent killer.

Conversely, anytime you take some risk and invest your money you’re going to see periodic losses on your portfolio at some point during any given year…and some years you’ll lose money for the whole year!

This chart shows the annual returns for the sample diversified portfolio in the Quilt since 2001.

The blue bars represent the total return in each of those years. The red diamonds represent how much that portfolio was down at its maximum point in the year.

Even in a strong year like 2023, this diversified investor had to endure an 8.5% drop in the value of their portfolio at one-point last year.

The bottom dashed line is the average yearly correction which has been 10% over this period, even though the vast majority of years still finished positive.

The worst correction was 35% in 2008. These yearly downturns in the value of an investment portfolio are to be expected to get the top grey dashed line which is the average return of 7% over this period. It’s the price of success.

This is why investors put up with the sometimes-sharp ups and downs that come with investing in capital markets. It’s been proven to be the only way to get ahead.

Election Year

 

Finally, as we turn to 2024, I need to remind you that we are heading into a US Presidential election year. There will be lots of cross words across traditional and social media, calls for Civil War, and celebrities threatening to move to Canada. But I want to arm you with an important fact.

At the risk of upsetting some of you, the market has grown just fine under both democrat and republican regimes. The investor who got out of the market because he/she disliked Reagan or Bush Sr or Clinton or Bush Jr or Obama or Trump or Biden has missed out on significant compounding investment returns.

As you go through this election year and perhaps get discouraged about the future of our country and the world’s largest economy, remember the most dangerous words in investing are “this time is different.” It's best to stay the course.

Cheers to a happy and successful 2024!

Please reach out if you’d like to discuss this together. Or if you're new here, click on the "Schedule a Meeting" button to have an introductory call with us about your planning and investment portfolio.

Happy planning,

Brian