2024 Economic Themes

2024 Economic Themes

February 02, 2024

As we settle into the new year, this is a good time to reflect on where we’ve been and look to the year ahead. 

At the beginning of last year, we outlined three economic themes that we thought might have an impact on the economy and markets in 2023, and following is a summary of how they played out last year:

  • Continued volatility: We experienced interest rate volatility we haven’t seen since the Global Financial Crisis (2008 – 2009). Bank instability (including a couple bank failures) dragged markets down at the beginning of the year, but as the year progressed, markets rode the surging tide of Artificial Intelligence (AI) stocks.
  • Moderating inflation: While actual prices largely remain higher than they were a few years back, it was a welcome development to see inflation fall from an annualized high of 9.1% in 2022 down to 3.2% in October 2023.
  • Bear Market Bottoming: Domestic stocks rallied from October 2022 lows to December 2023 highs by over 30%.

While our projected themes were largely realized, we’re not in the business of trying to predict events or market outcomes, and indeed, a lot happened that didn’t fit neatly into our proposed themes: a banking crisis, U.S. Debt downgrade, military conflict in the Middle East and an “AI super cycle” dominated by the so-called “Magnificent 7” stocks (Alphabet, Apple, Meta, Microsoft, Nvidia, Amazon and Tesla).

Following are themes for 2024 that may indicate what could be in store in the near and intermediate-term future:

The Messy Middle

While inflation has fallen considerably from its peak, some might suggest more work is needed given inflation remains above the Fed’s 2% target. However, 2% is just an arbitrary number and “normal” inflation is likely destined to settle higher.  Additionally, the Fed isn’t likely to risk the collateral damage of continued rate hikes, such as adding fragility to the banking system, just for the modest benefit of moving inflation from, say, 3% to 2%. So, if not 2%, what is the target?

You might think of it as the “messy middle”: an inflation range of 2% to 5% and one we may be in for some time.  This range would keep the Fed on their toes, to prevent inflation from increasing substantially again, but it could also give the Fed justification to stop rate hikes and even begin to cut rates (possibly as soon as this year). 

Don’t Predict (Recession), Prepare

At the end of 2022, Bloomberg compiled outlooks from 51 institutions, the vast majority of which called for a recession in 2023. Quotes like “A recession is all but inevitable” or “2023 will go down as one of the worst for the world economy in four decades”. But as we all know, that’s not what happened.  Instead, U.S. GDP rose 4.7% from Q4 2022 to Q3 2023 (the last reported figure), so how did so many prominent economists and analysts get it wrong?  In short, the tenacity of U.S. consumer spending and far better than expected results of putting the inflation genie back in the bottle led the U.S. economy and markets higher.  

Does that mean victory should be declared and the fear of recession shelved?  In a word: no.  In fact, if anything the odds of an economic slowdown may have increased.  However, we should also plainly acknowledge that a recession is always coming.  It may be right around the corner or years away, but recessions are a regular part of economic growth and contraction.  Rather than trying to time a recession, we think focus should be spent on ensuring portfolios are constructed to withstand the next one.  A resilient portfolio shifts the objective from predict to prepare and maintains a diversified mixture of asset classes that is calibrated for one’s risk profile (tolerance for risk, capacity for risk, time horizon, etc.).


Concentrated Consequences

The so-called “Magnificent 7” stocks were up on average 94% year to date through November 2023.  If these seven stocks weren’t included, the S&P 500 would have only appreciated about 6% through the same period.  With their growth, the Magnificent 7 now make up a record setting 28% of the S&P 500 and 48% of the growth-oriented Russell 1000 Growth index.  

With such a large percentage of returns delivered by such a small number of companies, a key consideration for the near future is what impact this narrow group of stocks will have on future outcomes.  A narrow band of securities contributing to the success of markets intuitively creates more fragility going forward.  While we cannot control markets, we can control how our portfolios are invested, and diversification, as ever, is key.  While we want some exposure to the Magnificent 7 to participate in their appreciation, we also want to limit downside risk in the event their market leadership collapses.

Final Thoughts

You might be wondering where the upcoming general election fits into all of this.  While it’s true that elections can significantly influence the direction of the country, including economic and tax policy changes, elections themselves are not fundamentally economic in nature and, therefore, don’t tend to systemically influence markets a great deal.  Long-term data suggests market returns in the 12-months prior to a general election tend to be a little lower than average, albeit with a little higher volatility due to uncertainty.  Regardless of which party wins the election, however, market returns in the 12-months following a general election tend to be a little above average.  Of course, that doesn’t necessitate that the 2024 election will follow these past trends, but it’s not a “theme” that we’re particularly concerned about.

In closing, the long and variable impact of the momentous move up in interest rates is still being felt and to some degree understood.  These changes have many important implications for asset prices and the economy.  If we step back though, we quickly realize this is a good “problem” to have.  Long-term investors seeking reasonable rates of return no longer must do so by relying on consistent outsized returns of riskier investments. This was a hallmark of the last decade in which extreme low-interest rate policies produced fixed income returns that were well below historical averages.  That environment placed a lot of pressure on stock returns to consistently outperform their historical averages in order for a diversified investor to achieve reasonable growth.  Expecting consistent outperformance from stocks is not a sound long-term strategy, so although the march to higher interest rates was uncomfortable, we’re now in a better environment.  Ultimately, we’re firm and constant proponents of diversification, asset allocation and rebalancing, and sticking to these time-tested fundamentals has historically rewarded long-term investors.





The views expressed represent an assessment of market conditions at a specific point in time, are opinions only and should not be relied upon as investment advice regarding investments, sectors or markets in general. 

The above statistics and/or commentary has been obtained from sources we believe are reliable, but we cannot guarantee their accuracy or completeness.  Past performance is no guarantee of future results. 

Specific securities discussed herein are illustrations and do not represent securities purchased, sold or recommended for client accounts.  Such information does not constitute, and should not be construed as, a recommendation to buy or sell specific securities.

This is not a complete analysis of every material fact regarding any company, industry, or economic condition.  Due to shifting market conditions, all expressions of opinion are subject to change without notice.

The information contained in this document does not cover all tax strategies that may apply, is not a complete guide to tax planning, and does not constitute the rendering of legal, accounting, or other professional advice or opinions on specific facts or matters.  Before implementing any ideas suggested here, consult with your tax advisor regarding your specific tax situation.

Talk to your financial advisor before acting on information in this document.