The stock market finished 2023 in fine fashion, ignoring the many economic and geopolitical risks that threaten it. By the end of the year, many US indices had recovered all of their losses from 2022, driven primarily by enormous gains in large technology stocks. The Federal Reserve added fuel to the market’s fire, and lit another in the bond markets as well, when they changed their interest rate outlook in December. Up until then they had been reluctant to telegraph any interest rate cuts. However, their most recent projection includes three rate cuts in the coming year.
It will be interesting to see how things work out in the coming year. On the one hand, the economy remains very resilient, for now, ignoring widespread recessionary prognostications. Raymond James, like most financial firms, is still forecasting a recession in 2024 - but again, like most firms, predicting an exceedingly mild one. Raymond James’ Chief Investment Officer, Larry Adam, suggests that the coming recession could be “the mildest ever…so mild that markets barely notice it.” That kind of faith in the so- called ‘soft landing’, which is becoming increasingly widespread, has likely contributed to the stock market’s near-term resilience.
On the other hand, that soft landing is far from guaranteed. Ignoring the many geopolitical risks to the economy, such as rising tensions in the Middle East or Chinese aggression toward Taiwan, inflation remains above the Fed’s 2% target, making expectations of interest rate cuts potentially premature. At the same time, the economy is still digesting interest rate increases from last year, and the full economic impact is probably not yet entirely evident. Also, as Mr. Adam concedes, “uber-optimism leaves the market vulnerable to disappointment.”
If there weren’t enough on the plate this year already, it’s also a presidential election year, and a particularly odd one at that. Barring some dramatic development between now and November, it appears nearly certain that we end up with the same two candidates as last time - candidates who most people would agree are past their prime and of whom a majority of Americans, according to polling data, disapprove. And for the first time since Nixon was president, we may have a presidential election with no presidential debates. But realistically, that’s probably fine, given the public’s familiarity with these candidates.
Historically-speaking, according to data from Bloomberg, election-year stock market returns do underperform non-election years by a substantial margin, on average, and with higher volatility. Yet even then, election-year returns are still positive, averaging mid-single digit returns. The question is will this behave like a typical election year? Ed Mills, Raymond James Washington Policy Analyst, says yes, “We would not be surprised to see 2024 track traditional presidential election years, where there are pockets of weakness during periods of the greatest uncertainty”. Those ‘periods of the greatest uncertainty’ include the primaries as well as the election itself. With the 2024 primaries mostly a foregone conclusion, that leaves just the election, and even that may have a minimal impact on things in the near term.
By the time the election finally rolls around, we will either be in a recession or we won’t. And it will either be a shallow one or it won’t. There is virtually nothing either candidate can do between now and then to change that. Beyond that, there may not be enough difference between the two candidates’ economic policies to severely alter the course of the stock market. Under both candidates the unemployment rate was historically low, economic growth was fairly steady, and consumer spending was high. Inflation was one area where the economic results were markedly different. Perhaps if the market assumes that things would have been considerably better under a Trump administration, that creates a tailwind. Still, it’s hard to imagine that alone turning a bear market into a bull, for instance.
At the end of the day, when it comes to markets and economies, the one thing you can be sure of is that there are no sure things. And we will surely be here to assist you, whatever comes.
The information above represents the opinion of financial advisor Travis Rus, and is not necessarily that of Raymond James. It is not a complete summary of all available data necessary for making an investment decision and does not constitute a recommendation, nor is it a complete description of the securities, markets, or developments referred to herein. Opinions are subject to change without notice. Information has been obtained from sources considered reliable, but we cannot guarantee that it is accurate or complete. Investing involves risk and you may incur a profit or a loss. Past performance does not guarantee future results.
