Since the start of the year, the S&P 500 is up over 8%, multi-strategy continues its triumph in the hedge fund world, and Bitcoin has returned to its all-time highs. What do you need to know in this environment to make smart investing decisions?
The good news is probably nothing. Default investments like target date funds or a standard diversified portfolio are sophisticated and sound. That being said, it’s fun to dig into the details so let’s take a look at what happened in 2023 and see what analysts are predicting for the future.
At the start of 2023, the outlook was negative. The S&P 500 had lost 20% the year prior, inflation was at 6.2%, and the consensus predicted a recession at some point in the year. However, 2023 ended up being a banner year in the markets with the S&P 500 delivering a surprising 24% return.
Predictions for 2024 are based on continuing good news for inflation. The Fed raised interest rates higher and faster in 2023 than people predicted, and yet economic growth continued. This was the surprising good news of 2023, and it accounted for a large part of the stock market returns. The analysis heading into 2024 has been that inflation will continue to come down, but that is already priced into the market.
Interestingly, analysts still forecast a 45% chance of mild recession at the start of the year. Given that, here are 5 scenarios of how economic growth and inflation might drive both the stock and bond markets throughout the rest of the year:
The base case is that inflation continues to come down, the fed cuts rates, and this boosts both stocks and bonds. This is reflected by the highlighted bars in the center. The bars right of center reflects a situation where the market runs a bit hot – companies do well but inflation stops falling, prompting the Fed to keep rates high. Bonds fall in this scenario because they had already priced in 6 rate cuts at the start of the year. The bars left of center reflect the opposite scenario: inflation falls as expected, but the economy stops growing. At the start of the year this was predicted as about 45% likely, but just three months into the year most analysts have dropped that prediction. Inflation data has been mixed in these first few months, and no one is predicting the early, aggressive rate cuts any more. The right-of-center bars with higher equity returns and fixed income losses now look like the most likely outcome for the year.