What a difference one year makes heading into 2024. Last year at this time, many were worried about whether we would see a recession in the months ahead.
By all accounts, it looks as if the best-case scenario has played out in the form of a soft landing. Indeed, we are kicking off the new year with a glass that is very much half full — toasting to an economy that once again has proved to be resilient.
In 2024, we expect the markets to continue to be hypersensitive to Fed policy. In December, the Federal Reserve gave everyone an early holiday present, signaling that it is done with rate hikes and that it will probably begin lowering rates in the second half of 2024. The Fed's inflation-fighting strategies over the past two years appear to have done the job as inflation appears to be sustainably heading down toward the Fed-preferred 2% range — and a bounce back in the months ahead remains a risk but is not our base case.
Moving forward, Fed policy should stabilize as long as employment and inflation continue to maintain trend.
The major indexes have been on a tear since the Fed signaled that lower interest rates may be in the near future. The S&P 500 came close to an all-time high; meanwhile, the Dow closed at another record, and the Nasdaq also continued its climb, even though it saw mostly top-heavy growth in 2023.
This is a major reversal compared to how we closed out 2022, when both the equity and bond markets closed negative for the year. We've also mostly been cured of the inventory and supply chain problems that once threatened the overall economy. Companies stand to reap the benefits in the form of strong margins and earnings that come in above expectations in the year ahead — and that should drive equities higher.
With that as a backdrop, I can see the Fed cutting one or two — and maybe even three — times in 2024. And if that happens, it will only pour more fuel on a strong-and-steady economy.
When considering investment strategies for the coming year, keep in mind that if things continue on the same path, we could see a revived housing market in 2024. Banks also stand to benefit from increased mortgage demand, while business capital expenditures that have been on hold in the current environment should come back online in the year ahead. A normalizing yield curve and interest rate stability will continue to support this broadening performance in equity markets and a strong economy.
The Bright Side
In its latest forecast, the Congressional Budget Office sees the U.S. inflation rate easing closer to the Fed's 2% target in 2024. The agency expects personal consumption expenditures — the Fed's preferred measure of inflation — cooling to 2.1% in 2024. Excluding energy and food costs, the gauge is set to ease to 2.4% from 2023 and hit 2.3% by 2025, according to the data.
