Take On the Year: What to Expect in Markets and Money in 2024 – WSJ’s Take On the Week – WSJ

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Dion Rabouin: What’s good everybody? I’m Dion Rabouin for The Wall Street Journal and this is WSJ’s Take On the Week, the show where we break down the most important things to watch in business and financial news. We cut through the noise to get you ready for what matters. This week we are looking forward to a new year. We’ll talk about what investors and households need to know and what they need to do to get their finances in order for a successful 2024. We asked you all to submit your questions about the economy and markets and you delivered. So today we are paying that back by providing answers to a few of those questions from WSJ reporters who are leaders in their fields of coverage. We got some good ones on the Fed, the economy, and the future of the U.S. housing market.
But first, let’s talk about 2024. A new year is upon us and with it new opportunities and new risks for investors. Last year, investment banks were predicting a mild recession, Fed rate cuts and a pretty unremarkable year in the stock market. Instead, the U.S. economy had its best growth in years. The Fed raised rates and the stock market delivered spectacular returns. Investors ditched the FAANG stocks, Facebook, Apple, Amazon, Netflix, and Google parent Alphabet in favor of the Magnificent Seven, Facebook, which is now Meta, Tesla, Apple, Amazon Nvidia, Microsoft, and Alphabet. So not so much new companies as a new name for the big tech firms that have been driving the market for the better part of a decade.
But will that trend continue? David Kelly, the chief global strategist for JP Morgan Asset Management joins me now to talk about what we will see in 2024 and what we won’t. David, we’re going to be looking forward to 2024, but I want to talk about 2023 a little bit because 2023 was a bit of a wild ride and I don’t think it went the way anyone would have expected coming into the year. So what did you learn from markets this year and what are you applying to your thinking going forward as we move into 2024?

David Kelly: Well, I’d look at it in terms of the economy and the markets. So the economy surprised me a bit, but actually not that much, and I’ll get to that in a second. What was really surprising is the way the markets behaved with long-term interest rates rising very sharply throughout the year and then suddenly right at the end of the year coming back down again as the Fed finally pivoted after we’d waited all year. So the markets were very much a roller coaster.
On the economy, it was a very good year. We saw economic growth well above trend. We have now seen 24 straight months with the unemployment rate below 4%. And inflation, which was such a huge problem in 2022, the inflation rate was 9.1% back in June of 2022, and it has come rattling down all the way to about 3% as we round out the end of 2023. So yes, prices are still high, but the inflation rate has come down very sharply and really what 2023 proved is that it is possible to have an economy that runs in full employment, that sees good economic growth, and still bring inflation back down towards the Federal Reserve’s 2% target.

Dion Rabouin: Mm-hmm. All good things. I mean, you summarized your kind of baseline U.S. economic forecast for 2024 using the number 2024. So you said you’re expecting 2% growth, economic growth, zero recessions, 2% inflation, and unemployment staying at roughly 4%. That sounds like the recipe for strong returns, especially, you know investors are starting to get that taste for risk back again. Should investors be going all in on risk right now?

David Kelly: Well, I think they’re already beginning to do that.

Dion Rabouin: I think so too.

David Kelly: The trend growth rate of the U.S. economy is a little bit below 2% and we think we can do a little bit better than trend.

Dion Rabouin: And really quickly, I want to stop you, David, because folks use that term trend growth. What does that mean?

David Kelly: What it means is that if the unemployment rate is basically stable at a low level, and so the only growth you’re getting is from growth in the labor force and growth and productivity, how fast would the economy grow? How fast does the economy grow at full employment? So we’re at full employment and as we calculate it, as the Federal Reserve calculates it, as other economists calculate it, that number is probably a little bit below 2%. The economy based on how it’s behaved in recent decades can probably only grow at about a 2% pace if you start from full employment. So that’s what we mean by trend growth.

Dion Rabouin: Got yah.

David Kelly: And I think we can achieve trend growth and I would say the chances of recession are less than 50% in terms of recession starting, but that’s sort of a cumulative risk. The more quarters you add on, the more likely it is that something’s going to go wrong. So sooner or later we’re going to slip in a banana skin here and end up in recession. But I would say that if we’re strictly looking at probabilities here, more likely than not, we get all the way through 2024 and we still don’t have a recession.

Dion Rabouin: We’re going to step away for a hot second and pay some bills. When we come back after the break, we’ll have the rest of our 2024 look ahead with JP Morgan Asset Management Chief Global Strategist David Kelly. He’s got a very bold prediction for 2024 that you won’t want to miss.
Thanks for sticking with us. Let’s get back to our interview with JP Morgan Asset Management Chief Global Strategist David Kelly. David, what is your boldest prediction for 2024?

David Kelly: Well, I think it is that not only is inflation going to hit 2% by the end of the year, which is ahead of the Fed’s forecast, but we actually think inflation could hit 2% by the spring. We’ve seen gasoline prices come down. If they stay at these low levels, and if you see a continuation of a decline in shelter costs, and if you see some break in auto insurance costs, that’s one big thing that’s adding to inflation right now. If auto insurance costs suddenly stop rising, then we could hit very close to 2% inflation on the PCE deflator, which is the Fed’s target by April or May of 2024, which is well ahead of what the Fed’s thinking at this stage.

Dion Rabouin: Yeah, that is a bold prediction. I like it because the Fed isn’t predicting we get there until 2025, which not even next year, and they’re really predicting we stay a little bit over that. Why are you confident that those things will happen?

David Kelly: As we look at it, it is a benign environment on the inflation side. There are risks though, because the more bullish we get on inflation, the more nervous I get about something going wrong in terms of recession. As I said, I think the economy can probably avoid it, but if inflation is low and if the Federal Reserve reacts to it and people start worrying about recession, you can have a self-fulfilling prophecy. So really there’s plenty of danger recession still out there, even though I’d say more likely than not we get into 2025 before one starts.

Dion Rabouin: Well, let’s talk a little bit about some of the worries maybe that you expressed in your outlook. You said that you expect growth, consumer and government spending, investment spending and international trade to all pull back in 2024. Those things seem pretty important, I mean, shouldn’t those pullbacks be cause for concern?

David Kelly: Well, consumer spending is 68% of GDP. It’s awfully hard for us to get into a recession if consumer spending is growing and we do think that consumer spending will probably continue to grow, maybe people should pull back, but the truth is American consumers don’t spend to the limits of prudence, they spend to the limits of credit. So long as the banks are willing to lend to them, they’ll spend the money. I think on trade, these are minor pullbacks. The global economy will be picking up a little bit, but on the other hand, you’ve got still a high dollar. On government spending, you might get some slowdown in the growth in state and local government spending, but it’s not enough. These things are smaller and they’re not enough to put the economy in recession themselves unless something else happens.

Dion Rabouin: One thing I noticed in the third quarter as I was going through those earnings results was a lot of companies have been cutting back spending to boost profitability. You see a lot of companies really beating on those profit numbers, those earnings numbers, but then missing on revenue or delivering below-expected revenue. Is that something you’re worried about looking towards 2024?

David Kelly: No, I see that exactly the other way around. We know that the global economy is growing more slowly. We know the U.S. economy is growing more slowly in nominal terms. If the inflation rate’s coming down, you’re not going to have the same growth in sales this year as you did last year. So on aggregate, this slowdown in revenues is absolutely inevitable and there’s nothing that companies in aggregate can do about it. What’s really remarkable here is that given the exogenous slowdown in sales growth that they’re all facing it, American companies have been extraordinarily successful at maintaining margins by controlling costs. And I think that’s particularly the case when it comes to wages. I mean, we should have much stronger wage growth than we’re seeing, and the fact that we’re not, really I think is testament to the willpower of American companies and the ingenuity of American companies in finding ways not to pay the workers.

Dion Rabouin: And the wage growth data has been stagnant in recent months. David, what’s one more thing you think investors should be thinking about as they look forward to 2024?

David Kelly: Yeah, I think one thing to look at is, look the rest of the world, and I know this is a bit of a broken record because for years international stocks have underperformed and people have been disappointed by them. This outperformance in the U.S. market has been really driven, not just by the performance U.S. companies, but also by a rising dollar. And as the Federal Reserve brings down interest rates probably faster than you’ll see in Europe, or in the UK, or in Japan, we expect the dollar to come down. And as the dollar comes down, that should amplify the return international investments. So I know that in 2023 if all you’d owned were the biggest large-cap U.S. companies, you would’ve done wonderfully well. But going forward, make sure you got value as well as growth and make sure that you got international as well as domestic in a portfolio. I think it’s very important to be well-diversified going into 2024, even if leadership in the market has been pretty narrow in 2023.

Dion Rabouin: That was P Morgan Asset Management Chief Global Strategist and Head of the Global Market Insight Strategy team, David Kelly. When we come back, we’ll get answers to the burning questions for 2024 that you, our listeners sent in. We’ll be right back.
We put out the request and you all responded in a big way. We weren’t able to answer all of the listener questions we received, but we got a few that we thought were particularly well-placed to help you all take on the year. Our first question comes from listener Victor Greenwich, who left us a voicemail.

Victor Greenwich: In today’s media landscape where there’s an abundance of financial advice, how can we discern between credible and misleading sources?

Dion Rabouin: We took this question to Bourree Lam, who is the deputy coverage chief for WSJ’s Life & Work section. Bourree, also recently, co-authored a WSJ book called, The New Rules of Money: A Playbook for Planning Your Financial Future. So she seemed like the perfect person to take on this question.

Bourree Lam: The main thing I’ll say to do is to listen or look for disclosures in the story you’re reading, or the YouTube video you’re watching, or a TV ad, or radio ad. When you hear advice, listen all the way to the end and see if there are any disclosures. This is required by both the FTC and FINRA, that if you’re selling something you have to disclose it to customers, whether it’s an ad, or whether it’s a piece of writing, or an informational video, you have to disclose that you’re selling something. So that’s the main way that you can really discern between whether someone is trying to sell you something, or whether they’re really trying to just give you some financial advice. If you need real financial advice, I would always say to find a professional, no such thing as a free lunch and look for a fee-only advisor.

Dion Rabouin: Read the fine print, that’s always smart. Thanks to Life & Work Deputy Coverage Chief Bourree Lam for that answer, and thanks to Victor for that voicemail. Our next question comes from listener Julia Boland who sent us a voice memo.

Julia Boland: I am a huge fan of the new Take On the Week podcast. I sell residential real estate in New York City, so it helps me understand how to best advise my clients. Naturally, my number one question for 2024 is, where do you see mortgage rates going?

Dion Rabouin: And taking on that question is WSJ reporter Gina Heeb who covers regional banks and consumer finance?

Gina Heeb: So with the path we’re on right now, it does look like mortgage rates should be lower next year. That doesn’t mean they’ll suddenly be say 3% again, but even double that is a relief compared with the 8% level that we were headed toward earlier this fall. Now, home prices, those are an entirely different story. We’ve seen a historic run-up in prices here that has been pretty relentless, especially because price movements in this market haven’t exactly followed the usual rules. For example, in the past, home prices have gone down when mortgage rates jumped this much, but in this cycle they actually continued to rise and to historic highs. The problem here is there are just not enough houses to go around.
People don’t want to trade in lower-rate mortgages that they got years ago for mortgages with 7% or 8%, and that has made low inventory levels in this country even worse. One dynamic to note here is that if rates do go down enough, more Americans will be in a position to move. Now, that’s not a bad thing, but that higher demand could actually prop up home prices even more. There is some forecasts that see prices soften a bit, but there are just a lot of variables here like inventory that we’ll just have to watch. Bottom line, lower rates should be able to offer some relief next year, but prices aren’t expected to go back to pre-pandemic levels. So the reality is the math might be a bit easier to buy a house next year, but it still might not add up for some Americans.

Dion Rabouin: It may be a while before things add up. The latest existing home sales report showed U.S. home sales increased in November, and prices rose for the fifth…

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