2023 may very well go down as one of the most unloved bull markets in recent history. The Index of Consumer Sentiment is a common measure of how investors feel about the market. While the index did slowly rise over the course of 2023, at the end of December it read 69.7 – which is lower than it has been 83% of the time over the last 45 years.1
Plenty of issues contributed to this sense of gloom, including violence in Israel and Gaza and a continued war in Ukraine. Closer to home we saw weather calamities, a border crisis, and a political climate that was barely functional. Against that backdrop, it’s easy to understand investor pessimism.
However, in terms of the economy and investments, many positives emerged including:
- Despite universal expectations for a recession, economic growth actually accelerated last year. Economists anticipate Gross Domestic Product (GDP) rose by 2.7% in the 4th quarter, compared to 0.7% the year prior.
- Unemployment has remained under 4% for over 2 years straight, which is the longest streak of sub-4% unemployment since the 1960s.
- Wage pressure, which can contribute to inflation, has eased as the number of workers has increased and the number of job openings, while still high, has fallen.
- Inflation, Public Enemy #1, has steadily fallen. The Consumer Price Index (CPI) has fallen from December 2022’s reading of 6.4% to last December’s 3.1%.
In short, there is much to celebrate from last year.
Naturally, our attention now turns to the New Year and our expectations for 2024. To be sure, there are clouds on the horizon: the Ukraine war continues and the conflict in Israel shows no signs of ending soon. Add a U.S. presidential election to the mix and there’s plenty of uncertainty out there – and we know the market hates uncertainty.
Nevertheless, against the backdrop, we are optimistic for market growth in 2024. Why? We’ve made huge strides in taming inflation, the likelihood of a “soft landing” is strong and expectations for a recession are fading. The pace of economic growth may slow somewhat, but the economy will likely continue to expand and unemployment remains very favorable.
As for investments, we believe many companies still have room for growth. The S&P 500 posted a total return of 26.92% in 2023. That may suggest we are close to a market peak. However, diving deeper into the returns, of the 500 companies in the index, the top 10 holdings accounted for 86% of the return. In other words, 490 stocks in the index only accounted for 14% of the total return.3
Dr. David Kelly, our favorite economist, put expectations this way: “Our baseline U.S. economic forecast for 2024 can be summed up by the number 2024: 2% growth, 0 recessions, 2% inflation, and unemployment staying at roughly 4%.”4
In short, fasten your seatbelts for volatility, but keep your eyes on the horizon as sunny days are ahead.
1,2”Notes on the Week Ahead; Balance Sheets and Resolutions” Dr. David Kelly, January 2, 2024
3“Guide to the Markets”, J.P. Morgan Asset Management, December 31, 2023
4”Year Ahead Outlook; U.S. economy: Hoping for a boring 2024” Dr. David Kelly, December 15, 2023
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