Over the past 4 years, varied, strong themes drove the markets. In 2020, it was all about the pandemic. The theme for 2021 was the resulting supply chain issue, which was a bane to consumers and companies alike. The year of 2022 was sky-high inflation. 2023 was about proving commentators wrong—as 85% of economists in one December 2022 poll predicted a coming recession (Cowen, 2023). This opinion was not shared by Bloom or by Carson. Some of these themes were positive and some were negative, but it is important to remember that sentiment and predictions should never dictate your investment plans.
The outlook for next year can be summarized into 3 key themes: Inflation, Interest Rates and Innovation.
The inflation story is done
Inflation came back to earth last year and we experience disinflation. Core PCE (Personal Consumption Expenditures Price index) is at the fed’s target of 2% despite lingering issues in shelter and automobiles. Core PCE excludes food and energy; we know from visits to the grocery store that food prices are still elevated. We believe that housing inflation, especially in rentals, will continue to fall. Car prices also will likely fall next year with an increase in supply and lower interest rates making car purchases the most attractive since 2019. The decline of inflation as one of our themes directly impacts our next key theme of falling interest rates, up next.
Falling Interest rates
At their December meeting, the Fed was confident that they can lower interest rates beginning in 2024 because core inflation is at the target 2%. The Fed forecast 3 future rate cuts but the market has priced in 6 rate cuts. Falling interest rates are good for consumers, businesses and those that borrow. It is not good news for those that are savers.
We have talked about cash quite a bit over the past year. It has been years since cash, money market accounts or CD’s earned decent interest rates between 4-5%. The last time cash earned this much was prior to 2008. One of the opportunities in falling interest rates is to buy longer term in order to lock in higher rates. In our investment portfolios, we began to reduce cash late last year and increase our intermediate bond exposure because falling yields can lead to strong price appreciation. We believe that this trend will continue.
In our opinion, It is always okay to keep your emergency fund in cash as the risk of loss is near zero. We just don’t see cash as an investment strategy in 2024.
Innovation and AI Acceleration
We are seeing AI used in many areas outside of technology like manufacturing, health care, finance and retail. AI is also playing a role in smaller companies and is not just reserved for the mega tech companies. 177 of the S&P 500 companies mentioned AI in their 2nd quarter 2023 earnings calls, more than ever before (Butters, 2023). This is a theme that should continue to develop for some time and is getting much broader participation among companies that are investing in artificial intelligence.
We cannot predict what theme will dominate the markets in 2024, but we can control how we react to positive and negative surprises by maintaining a measured, long-term approach to your financial plan.
We wish you well in this New Year!
Amy Noel, Founder & Wealth Advisor
Butters, J. (2023, September 8). Highest Number of S&P 500 Companies Citing “AI” on Q2
Earnings Calls in Over 10 Years. FactSet.https://insight.factset.com/highest-number-of-sp-500-companies-citing-ai-on-q2-earnings-calls-in-over-10-years
Cowen, T. (2023, December 26). How Were So Many Economists So Wrong About The Recession?
Financial Advisor Magazine.https://www.fa-mag.com/news/how-were-so-many-economists-so-wrong-about-the-recession-75899.html