Written by: Derek Melvin
With the year 2023 coming to an end, these next few weeks will be spent reflecting on the year that was and beginning to look ahead for what is in store for us in 2024. In the financial industry, you will begin seeing many articles come out with predictions for the economy in 2024.
Like this article you are about to read, nobody knows what will happen, so this is merely a fun exercise at predicting the future, which we know can be difficult, especially when we are talking about the economy.
As are many years, 2023 is a great example of this. Despite domestic bank failures, a sharp rise in interest rates, conflict in multiple areas of the world, stingy inflation, among other items, the S&P 500 is currently positive over 20% year to date at the time this article was written. Of course, there are many positives that we have seen in the US economy in 2023 like decreasing inflation from highs in 2022, exciting AI technology innovations, strong labor market, etc., but that 20% positive figure may be a surprise to many.
Almost any year when looking in hindsight you can find multiple surprises in the US economy, showing the difficulty in accurately predicting what will happen year in and year out. Therefore, like nearly all market predictions you will read going into 2024, these are sure to be wrong and it is simply a fun way to see how we do at the end of the year.
Prediction 1: Mortgage Rates will Decrease in 2024
With recent Consumer Price Index reports showing that inflation in the economy is slowing, we have reason to believe that interest rates may be coming down sooner than expected.
Inflation and interest rates are strongly linked. With steep inflation in the US economy following the Covid-19 pandemic, where many households had record high savings balances, the Federal Reserve needed to raise interest rates to slow down spending. This has so far worked, with inflation continuing to trend down. When the Federal Reserve increases rates, this impacts interest rates you receive on your mortgage, auto loan, student loans, etc.
As inflation has cooled, that increases the likelihood that the Federal Reserve can slowly begin cutting interest rates, which would then allow mortgage rates to decline. This would be a welcome sight to many individuals looking to purchase a home in the coming years.
I would not expect rates to decline significantly, however. Despite the notion by many that we are in a severely high mortgage rate environment, with current average 30-year fixed mortgages around 8% at the time of this article, the 30 Year Mortgage Rate in the United States averaged 7.74% from 1971 until 2023. This shows that we may have gotten too used to very low mortgage rates (sub 5%) following the 2008 financial crisis and higher rates are to be expected moving forward.
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Prediction 2: S&P 500 Hits Record High
My next prediction will have a bit to do with prediction number 1.
The economy loves lower interest rates. Companies and individuals alike can borrow money cheaper. For companies, this means they can reinvest more money back into their company or pay more money out to their shareholders. For individuals, that is more money to spend how they would like, investing for retirement, vacations, cars, etc. Both examples are good for the overall economy.
The record high for the S&P 500 occurred in January of 2022, reaching an intraday high of $4,818.62. Currently, the S&P 500 sits at $4,612.56. This means that an increase of 4.47% from current market values would reach all-time highs. I do not think this is far-fetched for the upcoming year.
Prediction 3: Consumer Spending will Tighten Early
Despite the hope of lower interest rates in 2024, which may allow for the consumer to free up some additional discretionary income, I feel consumer spending will be a vocal point of economic discussion in the early stages of 2024.
With federal student loan payments resuming for the first time in over 3 years, still relatively high prices on essential items such as food, gas, rent, etc., I expect spending to tighten for consumers, especially earlier in the year.
As inflation continues to make progress and interest rates to therefore decline, spending may pick up steam in the back half of the year, but I expect a sluggish start from the consumer.
Prediction 4: The Stock Market Will Go Up, And Down
As mentioned, these are only predictions, and the economy is very hard to predict.
This is one prediction I am confident will come true. The stock market will go up, and it will go down.
A large majority of investors reading this are long-term investors, meaning that you are not expecting to pull from your retirement or investment accounts within the next 5 to even 40 years for some. In that time range, if history is any indicator of future results, I am very confident that a globally diversified investment portfolio will increase in value. I am not confident where the stock market will close today, tomorrow, or next month as the market can be very unpredictable.
With that said, being a disciplined investor through market dips and volatility is very important. That is, having a plan for your retirement and investment portfolio dollars and sticking to it.
If you would like to go into more detail on what that investment plan may look like for you, reach out to us and we would be glad to set up an initial meeting to begin this discussion with you.
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Disclosures:
Please don’t take anything in this post as an economic forecast, as we cannot predict the future with any certainty. Consult with your financial advisor before acting on any information. Any investment involves risk of loss, including total loss of principal. Being diversified does not insulate from potential losses.
