No economist or market watcher has a crystal ball. So when it comes to making predictions for the year ahead, many take a conservative stance, making their bull or bear case with a litany of caveats.
Over the past couple of years, though, investors have been anything but wishy-washy. In 2022, as the Federal Reserve introduced an unprecedented interest rate hiking regime in an attempt to control sky-high inflation, investors sold out of stocks, resulting in an 18% decline in the S&P 500 index.
This year has been far rosier for markets. Slowing inflation has allowed the Fed to take its foot off the gas, an encouraging sign that the central bank may be able to engineer a so-called “soft landing” — slowing the economy down enough to cool inflation without tipping it into a recession. Investors responded by boosting the S&P by some 25% this year with just under two weeks left to go.
What do the market soothsayers say about the year ahead?
With the Fed expected to cut interest rates in 2024, many predict a strong year for the economy and the stock market, but some are more enthusiastic than others.
Don’t expect a recession, but don’t expect things to go completely smoothly, says Kristina Hooper, chief global market strategist at Invesco. She’s calling for a “bumpy landing.”
“That’s recognizing that in a soft landing, there’s no real damage. I think there will be some damage to the economy,” she says. “It’s hard not to have some damage,” she adds, given how much and how quickly interest rates have risen.
Nevertheless, she eventually expects markets and the economy to bounce upward in 2024, a sentiment shared by Jay Hatfield, CEO of investment firm Infrastructure Capital Advisors.
Recent economic data “validates our theory that 2024 will be the year of rate cuts, and that’s very bullish for stocks,” he says. A decline in rates worldwide should spell a good year for markets and less of a possibility of a recession, he says. “So we’re as bulled up as we’re ever going to be, probably.”
The possible shape of a bull market in 2023
The current economy isn’t exactly the picture of health. Persistent inflation has put a strain on consumer budgets. “We’re already seeing that consumers are being more selective with their purchases. That’s come through on a lot of earnings calls,” says Hooper.
Hooper also notes a pickup in bankruptcies in 2023 versus 2022, a trend she can see extending into next year. “We’ll likely see some companies, particularly smaller ones, that have difficulty obtaining financing,” she says.
We may also see a slight increase in unemployment as businesses continue to digest the Fed’s rate regime — a move which tends to have a lagging effect on the economy, Hooper says.
These are all “very natural” parts of what happens when the Fed ramps up interest rates the way they did, she says. She expects any economic slowdown in early 2024 to be “relatively brief” with “some real acceleration and growth in the back half of the year.”
One factor bolstering Hatfield’s view that there’s no recession on the horizon: the housing market. “Nearly every recession since WWII has been characterized by a housing crash, but here we have a shortage of housing,” Hatfield says. “So the chance of a recession is remote in our opinion.”
In short, Hatfield expects lower interest rates to make it easier for companies worldwide to receive financing and do business. Mixed with a resilient U.S. economy and a continuing boom in artificial intelligence, markets are likely to find themselves on an upward trajectory in 2024, he says.
How to invest in 2024
Financial advisors generally caution against making any wholesale changes to your portfolio based on anticipated short-term moves in the market. It could be a time, however, to rebalance your portfolio by trimming some cash from your winningest positions and adding to some laggards.
Hatfield expects a particularly big year for stocks in the real estate and financial sectors, both of which had rough years in 2022 and haven’t bounced back quite as high as the broad market so far in 2023.
Likewise, Hooper says rebalancing could shift some of your assets out of large, fast-growing U.S. companies and into areas she sees as likely beneficiaries of a broad-based economic acceleration, such as smaller-company stocks and names from emerging markets.
But for younger investors especially, trying to figure out what will happen in the market in the upcoming year is far less important than internalizing the lessons of market history and sticking to your long-term plans, says Hooper.
“It’s hard to know what will happen. When we started 2022, the Fed didn’t expect to hike rates, and we weren’t prepared for the kind of annus horribilis it turned out to be,” she says. “We’ve had a nice recovery in 2023. Hopefully that serves as a reminder to readers that it’s important to stay the course.”