2023 In Review and 2024 Outlook

The Year 2023 In Review

The year 2023 was supposed to be a challenging year for stocks. Rising inflation and interest rates, a banking crisis, heightening tension between the US and China, the continuing war in Ukraine, the eruption of the Israel/Hamas war, worries about a new BRICS (Brazil, Russia, India, China, South Africa) currency to challenge the US Dollar world reserve currency status (see https://www.reuters.com/markets/currencies/what-is-brics-currency-could-one-be-adopted-2023-08-23/), and a United Auto Workers (UAW) labor strike conspired to dampen expectations for growth. Most analysts forecasted that the S&P 500 index will grow by a modest 5%-10% annual return. Interestingly, consumers shrugged off the already high and still soaring interest rates, and investors got enthralled by the promise of Artificial Intelligence (AI) and its prospect for an ever-expanding market that resulted in the S&P 500 rallying a remarkable over 24% in 2023 (see https://www.visualcapitalist.com/150-years-of-sp-500-historical-returns/).

The First Trading Week

The first trading week of 2024 is in the books, and it is already apparent that the market start for the year is not very good. Last Friday, January 5, the government released a red-hot jobs report that US employers added a surprisingly strong 216,000 jobs in December, signaling continued economic strength and causing the market to slide (see https://apnews.com/article/jobs-economy-unemployment-inflation-rates-federal-reserve-ad0fd064a35e8a93bc15eaf6ea982c1c).

Good News Is Bad News

Typically, good news makes the market go up, and bad news makes the market go down. But, in a high-interest rate environment, it is the opposite. Good news makes the market go down, and bad news goes up. The market was looking for a weaker jobs report after the 11 rate hikes that started on March 17, 2022, because a weak jobs report indicates that consumers and businesses will likely spend less, resulting in lower inflation. Lowered inflation implies lower interest rates, which ultimately fuels the market higher.

Recession vs. Soft Landing

The market is now wrestling with the question of recession: a debate on whether there will be an economic recession or a "soft landing." A recession is a significant decline in economic activity that lasts months or years and is characterized by shrinking gross domestic product (GDP), rising unemployment, and falling retail sales. The market is hoping for a soft landing. Otherwise, an economic recession can cause a severe market downturn.

6 Trillion Reasons for Bull Market

Should the collective market convince itself that there will be a soft landing, that is, no economic recession, then we can expect the market to rally. A $6 trillion cash hoard (see https://www.reuters.com/markets/us/6-trillion-cash-hoard-could-fuel-more-us-stock-gains-fed-pivots-2023-12-15/) is waiting on the sidelines, poised for deployment in the stock market. Soaring yields had spurred cash to rotate from the stock market into Fixed Income (money markets and other short-term instruments) as investors played spectators to the Federal Reserve's play in battling inflation.

What To Look Forward To

The Federal Reserve was dovish last December 6 when it decided to keep the interest rate unchanged. Consequently, the market is pricing in five to six rate hikes this year. If this happens, borrowing costs could fall in 2024 and convince investors to flock back into the stock market and send the market higher.

Experts vs. Monkeys

Princeton University professor Burton Malkiel famously claimed in his book, "A Random Walk Down Wall Street," that blindfolded monkeys throwing darts at the financial pages could select a portfolio that would do just as well as one carefully selected by experts. It is difficult to predict the future and impossible to time the market. Experts probably know better than us amateurs, but the truth is, the experts are not particularly good at foretelling the future. Let us look at the bright side: because the year has just started, the experts have not made many mistakes yet.