2023 REVIEW AND 2024 OUTLOOK: NAVIGATING A COMPLEX ECONOMIC TERRAIN
As we embark on 2024, it is crucial to reflect on the economic developments of the past year and prepare for the challenges and opportunities that lie ahead.
Inflation and the Federal Reserve’s policy response to inflation, was a significant concern for most of 2023. Inflation began to show signs of moderation, yet remained above central bank targets. As we ended 2023 the Federal Reserve appears to have signaled an end to its current rate hiking cycle and a potential pivot to rate cuts in response to easing inflation. However, these potential rate cuts are hard to justify considering the economy’s resilience to prior tightening and solid employment conditions.
Consumer spending continues to be resilient, and inflation is projected to ease but stay above 3%. The Fed’s stance in 2024 will be pivotal, especially in an election year where political considerations could influence policy decisions.
Markets are expecting that the Fed will cut rates several times in 2024. However, cutting rates before the economy slows could prolong the current economic cycle. Earlier-than-expected rate cuts are generally seen as positive, because easing monetary conditions bring about expectations of boosting economic growth. However, rate cuts by the Fed may end up being a policy mistake as they could lead to another upsurge in inflation.
Economic Resilience Amidst Restrictive Policies:
The U.S. economy displayed remarkable resilience in the face of these restrictive monetary policies in 2023. The robustness of the job market was a cornerstone of this strength, despite pressures in areas like manufacturing and housing. This economic resilience was highlighted by a significant annualized GDP increase of 4.9% in the third quarter, with the consumer sector being a principal contributor to this growth.
While the U.S. economy is expected to slow in 2024, its fundamental strength suggests a recession is not immediate. The job market, though cooling, has remained strong and the unemployment continues to remain at levels supportive of economic growth. However, other economies, particularly those with overextended housing markets, such as Canada and Australia, may face increased recessionary pressures as higher rates continue to be a headwind.
Economic Activity and Business Spending:
Fiscal programs like the Infrastructure Act, CHIPS Act, and the Inflation Reduction Act are positively impacting certain sectors. However, overall business investment growth has been tempered due to uncertainty about the economic cycle’s length. Businesses will soon face higher interest rates for debt refinancing. Prospects for capital spending could improve with a Fed easing monetary policy and signs of a global manufacturing upturn.
Equity Market Outlook and Earnings Expectations:
Upcoming corporate earnings reports will be crucial going in to 2024 as the S&P 500 Index’s price-to-earnings ratio ending 2023 above 20x. There’s a need for consistent earnings growth to justify these valuations. Companies that fail to meet their earnings or guidance expectations might face selective profit-taking. Investment strategies are likely to favor high-quality companies known for steady earnings and cash flow growth.
The resilience in consumer spending and the labor market suggests potential opportunities in consumer-driven sectors, although caution is warranted given the uncertainties surrounding the Fed’s policy decisions and global economic conditions.
Key Earnings Metrics (According to FactSet):
· For Q4 2023, the estimated (year-over-year) earnings growth rate for the S&P 500 is 1.3%. If 1.3% is the actual growth rate for the quarter, it will mark the second straight quarter of year-over-year earnings growth for the index.
· Earnings Revisions: On September 30, the estimated (year-over-year) earnings growth rate for the S&P 500 for Q4 2023 was 8.0%. Nine sectors are expected to report lower earnings today (compared to September 30) due to downward revisions to EPS estimates.
· Earnings Guidance: For Q4 2023, 72 S&P 500 companies have issued negative EPS guidance and 39 S&P 500 companies have issued positive EPS guidance.
Fixed Income Market:
For bond investors, 2023 was a sigh of relief, after avoiding a third consecutive year of losses. U.S. 10-year Treasury yields experienced a range, from as low as 3.25% in April during the banking crisis, to as high as 5.02% in October on strong third quarter economic growth. Treasury yields move inversely to bond prices. They generally rise when the economy appears to be strengthening and fall when economic growth appears to be slowing. The bond market’s performance in 2024 will be closely watched, especially considering the potential changes in the Fed’s interest rate policy.
U.S. 10-yr. Treasury
We have maintained a preference for bonds on the shorter-end of the yield curve while being mindful of opportunities to extend duration as market conditions evolve. Our focus on high-quality, investment-grade bonds over high-yield options reflects our commitment to quality and prudent risk management amid a dynamic interest rate environment.
Our focus for 2024 is balancing growth opportunities with prudent risk management. We remain committed to providing you with informed and thoughtful guidance as we navigate these challenging yet potentially rewarding economic conditions.
WILL 2024 MARK A RETURN TO NORMALCY FOR ECONOMIC AND CONSUMER BEHAVIOR?
As we enter 2024, there is a growing sense of a return to a state of normalcy, in contrast to the tumultuous years since 2020 and the pandemic. Let’s review the disruptions and dislocations that have marked recent years, how we have adapted and look ahead to 2024.
The Initial Pandemic Shock: 2020-2021
The onset of the pandemic brought unprecedented changes. The world saw a dramatic shift in consumer behavior, with reduced public outings and a surge in remote work. This period also witnessed extensive fiscal and monetary stimulus measures to stabilize the economy.
Dislocations and Adjustments: 2022-2023
The ensuing years were marked by the aftereffects of these disruptions. Supply chain issues and inflation were significant challenges. The Federal Reserve’s response, through tighter monetary policy and a gradual reduction in fiscal stimulus, was crucial in navigating these turbulent times.
2023 brought about continued technological innovation including the growth of AI (artificial intelligence). AI has brought about a new wave of optimism and opportunities for a surge in economic productivity.
Emergence into a Post-Pandemic World: 2024
In 2024, we see alignment with pre-pandemic norms. The shift back to office work, albeit hybrid, and the Federal Reserve’s potential easing of monetary policy, signaling a new phase of in policy. However, concerns about persistent inflation and elevated government spending as a GDP (Gross Domestic Product) percentage continue to linger.
There is a sense of “cautious optimism” as we continue to emerge in the post-pandemic world. The past years have underscored the importance of adaptability and resilience. As we move into this phase, these qualities remain vital in navigating the evolving landscape.
KEY DOLLAR LIMITS INCREASE FOR 2024:
Workplace Retirement Plans and IRAs
· The maximum 401(k) contribution is $23,000. People born before 1975 can contribute an extra $7,500. These limits also apply to 403(b)s and 457 plans.
· SIMPLEs have a $16,000 limit, plus $3,500 for individuals age 50 and older.
· The 2024 contribution limits for traditional IRAs and Roth IRAs is $7,000, plus $1,000 as an additional catch-up contribution for individuals age 50 and older.
· The income ceilings on Roth IRA contributions are higher. Contributions phase out at AGIs of $230,000 to $240,000 for couples and $146,000 to $161,000 for singles.
· 2024 deduction phaseouts for traditional IRAs range from AGIs of $123,000 to $143,000 for couples covered by 401(k)s and $77,000 to $87,000 for singles and household heads. If only one spouse is covered by the plan, the phaseout range for deducting payins for the uncovered spouse is $230,000 to $240,000
Standard deductions are higher for 2024.
· Married couples get $29,200, plus $1,550 for each spouse 65 or older. Singles can claim $14,600 ($16,550 if age 65 or up).
Tax rates on long-term capital gains and qualified dividends do not change. But the income thresholds to qualify for the various rates go up for 2024.
· The 0% rate applies at taxable incomes up to $94,050 for joint filers, $63,000 for household heads and $47,025 for singles.
· The 20% rate starts at $583,751 for joint filers, $551,351 for household heads and $518,901 for single filers.
· The 15% rate is for filers with taxable incomes between the 0% and 20% break points
A Note Regarding Tax Reports:
Generally, Schwab Tax Reports including 1099-R’s and 1099 Composite Reports will be made available by mid-February. If you need assistance with any of these documents please let us know