Happy New Year! Or in Oprah Winfrey’s words, “Cheers to a New Year and another chance for us to get it right”!
Every year starts with many proclamations from the pundits on Wall Street. 2023 was no different. However, the question is – how good were these forecasts and proclamations? Wall Street Journal article titled “What Did Wall Street Get Right About Markets This Year? Not Much” did a good job summarizing 2023.
In December 2022, Moody's Chief Economist Mark Zandi captured the prevailing sentiment at the time, “Usually, recessions sneak up on us. CEOs never talk about recessions. Now it seems CEOs are falling over themselves to say we’re falling into a recession. ... Every person on TV says recession. Every economist says recession. I’ve never seen anything like it.”
We entered 2023 with much anticipation of a recession, which however never materialized. This was a good thing. But it still did not make us feel good about 2023. In December, the Consumer Sentiment index was at 69.7, lower than it has been 83 percent of the time since 1978. Much of this sense of gloom lies beyond the realm of economic forces. The world saw another war start while it was still dealing with the ongoing war in Ukraine. On a global scale, we experienced higher number of weather-related calamities. At home, the migrant crisis, widening income inequality, a regional banking crisis, sharply rising interest rates, and a highly partisan political climate was not calm conducing. Many people would say this is nothing new. Humanity has always faced such events. However, the 24x7 media exposure, and an individual’s capability to speak and be heard instantaneously on social media, makes our world a big cacophony with sane voices going unheard. And the result is reflected in the Consumer Sentiment index.
2023 did have its good moments. We avoided a global recession; global GDP has probably grown by approximately 3 percent. The regional banking crisis stayed contained. Consumer savings from the pandemic have endured. Most of the leading stock markets have performed well. And the advances in artificial intelligence have raised hopes for more productivity and efficiency.
And here we are, at the doorstep of 2024 and the question is, can we get some of the stuff right this time?
2023 saw a period of the fastest interest rates rise. Concern has always been whether the Fed in its zeal to contain inflation, might overstep and create a recession. However, after the last Fed meeting, we believe the Fed recognizes that inflation risks are subsiding, and this brings more optimistic confidence for 2024. Despite a pause by the Fed, one big concern remains is the long-term effect of interest rate increases last year. It usually takes between 18 to 24 months for high rates to slow economic growth and this warrants a concern for a recession in 2024.
We should also see a shift of focus from the monetary policies to politics. 2024 will be a pivotal election year, not only in the United States but in many other countries, including India, Russia, South Africa, Taiwan and the U.K. Globally speaking, it could be one of the most impactful election years in history. A highly anticipated U.S. presidential election can cause much angst to the markets. While markets can be volatile in election years, historically which political party takes the White House has had little impact for long-term investors. Since 1936, the 10-year annualized return of U.S. stocks (as measured by the S&P 500 Index) made at the start of an election year was 11.2% when a Democrat won and 10.5% in years a Republican prevailed. (1)
And finally, a mention of a topic that captured the market’s attention in 2023 – artificial intelligence. In the long run, AI has the potential to have a huge impact on how we work and live. The beneficiaries of AI’s ascent will not be limited to the tech world. Similar to the internet, AI-driven applications will spawn innovation across industries and sectors. Until that happens, the challenge for us will be to separate hype from the real growth of AI in the years to come.
But where do we investors go in 2024? Before answering this question, I would like to share the sentence that preceded Oprah Winfrey’s statement mentioned at the start of this post, “Year's end is neither an end nor a beginning but a going on, with all the wisdom that experience can instill in us”.
So, for all the forecasting and proclamations, we should not forget that 2024 will have its ups and its downs. It will prove us right, and it will prove us wrong. But as investors, in 2024 and beyond, we should resolve to be disciplined and not get swayed by the noise around us. If we trust humanity, and human ingenuity, we will not only survive but we will thrive. It pays to be optimistic, cautiously optimistic. We are long-term investors, and as such, we should focus on larger trends. Listen to the weather report and be prepared but look for signs of large-scale climate changes.
As we welcome the New Year, may it bring you joy and peace, hope and fulfillment. Happy New Year!
(1): Sources: Capital Group, Standard & Poor’s. Past results and are not predictive of results in future periods.
Lavina Nagar, CFP(R) is the president and founder of Maya Advisors, Inc., a financial planning and investment firm in Palo Alto, California.