Market Commentary: A Look Ahead at 2024
MODERNIST’S ASSET CLASS INVESTING PORTFOLIOS ARE STRATEGICALLY INVESTED WITH A FOCUS ON LONG-TERM PERFORMANCE OBJECTIVES. PORTFOLIO ALLOCATIONS AND INVESTMENTS ARE NOT ADJUSTED IN RESPONSE TO MARKET NEWS OR ECONOMIC EVENTS; HOWEVER, OUR INVESTMENT COMMITTEE EVALUATES AND REPORTS ON MARKET AND ECONOMIC CONDITIONS TO PROVIDE OUR INVESTORS WITH PERSPECTIVE AND TO PUT PORTFOLIO PERFORMANCE IN PROPER CONTEXT.
From our Investment Committee, here’s a preview of what to watch for in Q1 2024.
And here are the big questions and key indicators to keep an eye on
between now and January 2025.
Question 1: IS A SOFT LANDING IN SIGHT?
Main Takeaway: The Federal Reserve may be getting closer to hitting its goal of taming inflation, and attention is turning toward whether it will begin cutting rates this year. Its rate hike campaign has proven effective: money flow has declined, and businesses and consumers have less access to credit. The job market has been feeling the impact, too. Compared to earlier in the year, unemployment has risen, job openings are down, and fewer people are quitting their jobs. Consumer spending has also slowed.
Top Risks: While the outlook for a soft landing — or cooling the economy without causing a recession — is looking more promising, the sharp rise in rates continues to pose challenges. Higher rates reduce the value of banks’ long-term holdings and put stress on consumers. Meanwhile, the government's expansionary fiscal policy increases federal debt, and higher rates raise its debt servicing costs, compounding the nation's debt problem. Inflation could also resurge in 2024, and the Fed may not be able to cut rates as aggressively as the market currently expects.
Sources of Stability: Although economic growth is forecast to slow in 2024, most professional forecasters are not expecting a recession. At their December meeting, the Fed’s policymakers clearly signaled that they would begin cutting interest rates this year. Lower interest rates could boost the more interest rate-sensitive areas of the economy, such as housing, manufacturing and banking. For both inflation and consumer confidence, the sharp decline in oil prices has been a big positive.
KEY ECONOMIC INDICATORS: AREAS TO WATCH
Economic Growth
Although the manufacturing industry continues to contract, the services sector remains strong. While economic growth is likely to slow, there are no excesses of the type that led to the 2008 financial crisis nor any excesses in inventories. The Philly Fed’s latest survey does not predict negative growth in any quarter in 2024, indicating a low probability of a recession. (2) However, households are running out of excess savings and student loan payments have restarted, putting pressure on consumer spending.
Inflation Trajectory
Through November, headline CPI increased 3.1% on a year-over-year basis, down from 3.2% in October. (3) Core CPI (which excludes the more volatile food and energy sectors) grew 4.0%, unchanged from October. (4) The shelter index – a measure of costs associated with housing – increased 6.5% over the last year, accounting for nearly 70% of the total increase in the core CPI. Falling prices in China have helped suppress global inflation, but inflation forecasts for 2024-2025 are still above target.
Monetary Policy
Although inflation is slowing, CPI remains above the Fed’s long-run 2% target. The Fed continues to shrink its balance sheet by approximately $100 billion every month through quantitative tightening, effectively draining liquidity from the system and pushing rates higher than they otherwise would be. However, the Fed appears to have raised its target rate as high as needed, with the range left unchanged at 5.25%-5.5% at its final meeting of 2023, and the Fed’s “dot plot” shows the central bank could cut rates by 0.75% in 2024. (5)
Fiscal Policy
Economists continue to raise concerns that the U.S. government debt burden is reaching unsustainable levels, with the U.S. debt-to-GDP now exceeding 100% and forecast to continue rising. The risk of a government shutdown could become an ongoing threat to the economy. The next few years will include several predictable fiscal policy deadlines that will force congressional action. Addressing the deficit problem will require significant increases in taxes and reductions in benefits, a tough order for politicians.
Labor Market
Labor markets show more signs of softening: companies are adding jobs at a slower pace; wage growth has decelerated; and the quits rate has dropped – all of which are leading to some pullback in consumer spending and likely slower economic growth. The unemployment rate crept up from a low of 3.4% in January 2023 to 3.9% in October before dropping to 3.7% in November. (6) The CBO expects the rate to rise to 4.7% by the end of 2024. (7)
Consumer Spending
Consumer spending, which represents about two-thirds of GDP, is slowing. (8) Post-COVID-19 savings — the main driver of GDP growth in 2023 — were expected to run out by the end of last year, and the restarting of student loan payments has put further stress on the 40 million people who have student loans. Credit card debt increased by $48 billion in the third quarter to $1.08 trillion, (9) and credit card delinquencies rose. Credit has also become harder to obtain.
Housing Market
Housing construction as a share of GDP is near all-time low levels (and about one-third of what is was 60 years ago). (10) At the same time, mortgage rates are high, resulting in October existing home sales falling to the lowest level in 13 years, on track for the worst yearly performance since 1992. (11) However, the inventory of homes for sale is very low, keeping prices up. If we do see lower mortgage rates this year, that should help unfreeze the resale market. Thus, the downside risks to the economy from housing are low.
Global Economy
The U.S. is grappling with several geopolitical concerns around the world, including conflict in Ukraine, Israel and ongoing tensions with China. Rising nationalistic policies and political tensions increase the risk of a trade war. That would not only slow global growth but also increase inflation through tariffs and other trade impediments. Government incentives that favor domestic purchases over international trade would likely lead other nations to respond similarly.
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