🔎 Market Mysteries

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Last year, we said 2023 would be the year of the return to a normal, slow-growing, mature American economy operating without the support of emergency government programs. That’s pretty much what happened, despite broad certainty that we would fall into a deeper economic slowdown with higher unemployment.

This year, we’ll remind you that predicting what will happen in the next year for the economy is like predicting the weather. Understanding the trends helps us prepare. If we expect a chance of rain, we can pack an umbrella and grab it when the clouds grow darker. Otherwise, we enjoy being wrong. Predicting people’s emotional reactions to the economy, aka the stock market, is a waste of energy. Let’s understand the trends that will affect us, the risks, and how to position ourselves for success with our careers, homes, and investments.

You may not believe me if I told you this was one of the best years for the economy in our lifetime. Looking at the main metrics of wealth and business activity, economic growth (real GDP) surged, the stock market posted a massive rally to nearly a new high, home prices hit new records, and unemployment remained near historic lows. This all happened while economists were virtually certain that the dramatic policy changes from the Federal Reserve would push the economy into a downturn.

Policymakers achieved the rare soft landing, cooling the overheated economy to a normal state without freezing it into recession. The Federal Reserve raised the cost of borrowing more significantly and more quickly than ever, attempting to slow borrowing, spending, and general business activity to get inflation under control. Inflation has reached a more normal level over the past six months, and the economy is fine. Whether this is just the short-term crossing of the equilibrium as the economy heads into a downturn has yet to be seen. It will depend on the consumer, wages, and whether companies can really handle higher interest rates. A recession seems much more likely in 2024 than in 2023.

Worsening inequality and the shock of rapid inflation are likely the main reasons consumer confidence hasn’t recovered alongside the stock market or economic growth. The past few years of soaring living costs and money flooding into financial markets have exacerbated the trend of inequality in America. The wealthiest individuals have gained more wealth, while the average working American gets worse off every year. Record stock market and home prices are great wealth-builders for those who own, but that’s a shrinking share of the working population.

Labor strikes hit multi-decade highs this year because America’s workforce is struggling to make a living. Record-low unemployment is no longer a sufficient measure of economic well-being if having a job doesn’t guarantee coverage of basic living expenses. Most of the country is living paycheck-to-paycheck. The minimum wage hasn’t been increased from $7.25/hr since 2009, but if it were raised along with labor productivity, it would be closer to $23/hr. While wages started growing faster than the cost of living this year, there’s still a long way to catch up. The price tags at the grocery store surged much more quickly than anyone’s income, and it will be a while before that shock wears off.

It’s more possible than it usually is. One of the most confusing aspects of the discussion about inflation is that falling inflation still means things are getting more expensive. Inflation is the growth rate in prices, so low inflation means things get more expensive less quickly. Things rarely ever get cheaper, aka deflation. Consistent deflation can create several problems for the economy, so policymakers target a low enough inflation rate that our incomes keep up and the cost changes are relatively inconspicuous.

The main forces that drove the hyperinflation aren’t likely to resurface this year. Inflation is all about supply and demand. We had too much money chasing too little stuff, encouraging sellers to raise prices. The post-pandemic years combined a massive stimulus of more money pumped into the system by the Federal Reserve and the government with global lockdowns that made it more difficult for companies to produce stuff quickly enough for the exploding demand. Now, supply chains are clear, the Fed is pulling money out of the system, and government support programs have ended. Of course, we could see more geopolitical issues with China, Russia, Iran, you name it that disrupt trade.

Companies may be forced to cut prices. Call it greed or riding the bandwagon; companies have been pushing prices up as far as consumers will let them. Now, it’s getting more evident that the economy is slowing, and consumers have run out of their lockdown and stimulus-fueled savings. Big grocery chains are discontinuing major brands because of their soaring prices, and more companies are reaching the end of their pricing power. Given the unprecedented nature of the last few years, it would seem fitting to have an unprecedented year of deflation. The question is whether that’s caused by a recession or if companies can carefully navigate cost cuts to earn loyalty and sell more stuff. In other words, deflation could be a symptom of a recession or a short-term stimulus for the economy. More than a third of the population would welcome a recession if it meant prices would decline.

Homeownership moved out of reach for many more Americans this year, and it’s unclear if or when that will change. Home affordability is at record lows going back to the 1980s. It now takes over 40% of the median household income to cover a monthly mortgage payment after averaging less than 25% for the past 35 years. The two main problems are high home prices and expensive mortgage rates, neither of which seem likely to fall significantly without a financial downturn.

Home prices are a problem of limited supply, which may get better over the next few years. First, it was pandemic disruptions that limited home construction. Then, the rapid increase in mortgage rates has deterred homeowners from selling, shrinking the available homes on the market to half of what it was pre-pandemic. People want to hang on to the cheaper mortgages they locked in a few years ago. While construction has picked up, it would take a steep decline in mortgage rates to open up that supply this year.

Be prepared for more layoffs in 2024. With slowing business activity, companies will be focused on minimizing their costs. Payroll is usually the most significant expense. However, workers are still precious. So it’s more expensive to replace someone than to keep them. Companies have grown more cautious about turnover. Hiring is down 15% over the past year, but layoffs are still very low.

Job seekers may need to get creative with their job search, looking across industries and company sizes. Small businesses, which employ half the country, are still struggling to fill positions. In-person jobs are hiring more than remote ones. Finding a job in marketing, human resources, finance, or software development is getting harder.

Trying to predict short-term stock market moves is a waste of time. No one is good at timing the market, and the brightest minds stink at forecasting. Last year, the range of predictions from Wall Street Analysts was the widest in over a decade, projecting everything from rising 10% to falling 17%. The market ended up 24%. Analysts rarely get it right. Only seven times in the past twenty-three years has the S&P 500 index finished within 5% of index predictions. However, it’s essential to understand what moves the market.

Emotions rule the market in the short term, which is what makes it so difficult to predict. Investors hate uncertainty, so the reason markets have rallied so much is because everyone has jumped on the soft landing train, thinking inflation is under control, the economy is solid, and interest rates will start coming down. The thing that breaks a rally is fear of the consensus being wrong. Anything that might stoke fears of resurgent inflation or waning consumer spending could create volatility. There’s also always the guaranteed unknowns like a potential trade war with China, geopolitical issues, a real estate crash, etc. Also, the US election cycle brings some natural uncertainty.

Over the long term, earnings drive returns. Corporate profit growth is what makes stocks go up. Growth is the keyword. They need to be making more money every year. Since companies spent the last year reducing costs, they need to find a way to boost revenue. They’re running out of power to raise prices. If consumers can’t keep up their spending, it could mean trouble for corporate earnings. Also, companies haven’t yet really felt the full effect of higher interest rates. They’ve enjoyed essentially free borrowing for the past decade. As more of their debt rolls over at costlier interest rates, it will squeeze profits further.

Whether it’s a recession or a soft landing, there aren’t many signs that point to 2024 being easier for the average American than 2023 was. The soft landing may be more like those plane rides where you hit the ground and fear for your life for a moment before you’re confident the plane is entirely on the tarmac.

Prepare for emergencies. Our aging population and poor immigration policies will mean a sustained worker shortage, keeping unemployment low. However, average unemployment is still 4-5 months. Make sure to have enough saved in cash for emergencies. Take advantage of savings accounts that pay over 5%. A recession feels a lot more likely than it did last year when looking at the most important aspect of the economy: the health of the consumer. Many economists have looked at consumer spending resilience as a sign of expansion, but it feels more like fading strength. Wages need to catch up. Loan delinquencies are low but rising quickly.

Be cautious with real estate investing. Real estate is still our wildcard for 2024. Office buildings are in a bad place. As travel demand wanes, the Airbnb-ification of the real estate market will take its toll, especially given high interest rates.

Take the emotion out of investing. Automate consistent contributions, and don’t try to time the market. Experts get paid millions of dollars each year to fail at beating the market. If their teams of analysts with supercomputers can’t do it, it’s probably not worth the effort.

Be nice to your elders. People over 65 have more of the country’s wealth than ever, and they’re likely to be the ones who can keep the economy going. Tell them to spend a lot and invest in things that make the future better.

Keep building,

The Scoop Team