After an up and down first ten months of 2023, investment markets soared in November and December as it became clear that the US Federal Reserve Bank is satisfied it has raised short-term interest rates high enough to push inflation down toward its 2% target. Investors spent most of 2023 worried that higher interest rates would push the US economy into recession, but resilient consumer spending and higher government outlays supported continued growth in the US Gross Domestic Product (GDP). Corporate profits did experience an earnings recession in late 2022 and the first half of 2023, but the prospect of lower interest rates in 2024 was all the optimism investors needed to boost values of both stocks and bonds to satisfying full-year gains.
Most economists now believe the US economy will avoid falling into a recession, overcoming the negative impact of higher interest rates on consumer spending and business confidence. A still strong employment market and buoyant investment values are the leading indicators that support a soft landing for the US economy. Over the past 40 years, economic growth has become more consistent as consumer spending has grown and manufacturing activity has shrunk as a percentage of the US GDP.
Recent recessions have all come as a result of a Black Swan event. After a decade of growth in the 1990s, the popping of the dot.com bubble combined with the 9/11 attack pushed the US into a short and shallow recession. The mortgage crisis in 2008 caused the 18-month Great Recession which shrunk the US GDP by over 5% and the unemployment rate peaked at 10% in late 2009. After 10+ years of steady economic growth, COVID-19 and the forced shutdown of most businesses delivered a quick, sharp recession in March and April 2020. Unemployment peaked at 14.7% and economic output shrank by 19%.
Investment markets experience more ups and downs than the US economy. Each recession since 1990 has coincided with a bear market for US stocks, but the bear market of 2022 did not derail US growth.
Entering 2024, there are reasons for investors to be optimistic. Government money market fund yields are around 5% and current interest rates for bonds are their highest in the past 15 years (they may have peaked at the end of October). The Federal Reserve is expected to start reducing the Fed Funds interest rate in the second half of 2024. When they do, money market yields will drop below 5%, while bond values should rise, boosting the total return for bond investors, adding to today’s higher interest rates.
Stock prices could also benefit from expected lower interest rates. In 2023, most US stock market gains were concentrated in the “Magnificent 7” growth stocks that appear best positioned to profit from artificial intelligence. While those stocks are priced for strong revenue and earnings growth, the broader market offers more attractive fundamental values. 2024 could be the year when the performance of value stocks, small- and mid-cap stocks and foreign stocks contribute more to the performance of investors' portfolios.
2024 is a presidential election year and investment markets are likely to bounce up and down in short-term reactions to both US and global political news. Expanding conflicts in Eastern Europe and the Middle East could trigger an unexpected event that slows global economic growth. While there will always be risks to the US economy, GDP growth has been more resilient in recent decades. Even if the US does fall into an economic recession in the second half of 2024, long-term investors should continue to maintain a diversified portfolio of stocks, bonds and cash. Any setback would likely prove to be short-term, and as we’ve seen time and again in recent history, investment markets have always rebounded to new highs.
This article was authored by Christopher Borden. Christopher is a financial advisor and Managing Partner located at Canby Financial Advisors, 161 Worcester Road, Framingham, MA 01701. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 508.598.1082 or firstname.lastname@example.org
Disclosure: Certain sections of this commentary contain forward-looking statements based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets. Investments are subject to risk, including the loss of principal. Because investment return and principal value fluctuate, shares may be worth more or less than their original value. Some investments are not suitable for all investors, and there is no guarantee that any investing goal will be met. This material is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product.
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