by Joe Herrle, CFA, CAIA
Vice President
Alternative Assets
It’s the holidays; for many, it is a time to reconnect with loved ones, share meals, exchange gifts and create memories that will last a lifetime. For those of us in the investment industry, it also means our news feed will be inundated with every research analyst, economist, strategist and personality on CNBC making predictions for the year ahead. While many forecasts can offer helpful insights, it is important to know how to interpret them. Some confuse them for gospel or fact, while in reality they only serve to help investors understand the range of outcomes ahead.
Take, for instance, the projections from a year ago. Heading into 2023, the average estimate called for the S&P 500 to decline, the first negative prediction since at least 1999. Last October, Bloomberg Economics predicted a 100% chance of a recession within a year. As it turns out, the prediction makers are getting served a giant slice of humble pie for the holidays: the market has returned almost 25% this year.
The interesting thing is what these forecasters got right. They correctly predicted that the Federal Reserve would raise rates more aggressively than expected, raising yields to highs not seen since 2007. What they got wrong is the knock-on effect of rate increases. Higher rates have yet to impact on the economy as was expected. The most predicted recession in history is still in the future; corporate earnings were resilient, and the U.S. consumer remains strong.
This is not to say forecasts are worthless; they can be very helpful. The best in the business conveys a range of outcomes, with each possible result having an associated probability; the worst forecasters ignore the range of possibilities and makes declarations.
So, what are the best guesses for 2024, and what insight do they offer? This year, the S&P 500's 2024 targets range from 4,200 to 5,500, which indicates returns between -11% and +14%, with the average suggesting a 4% increase. Reading between the lines, the wide range of estimates means there is likely volatility on the horizon as the preponderance of unknowns broadens the scope of possible outcomes.
One item forecasters agree on is that the Fed will cut rates next year, citing slowing inflation and a cooling job market as the cause. Adding fuel to the fire, Fed Chair Jerome Powell took a more dovish tone this week in his press conference and made it clear that the Fed is reorienting its thinking towards rate cuts sooner rather than later. And, as the market is forward-looking, the confidence that rate cuts will occur next year has produced one of the best months on record for both stocks and bonds. Since October, the S&P 500 has risen 12.5%, and the S&P U.S. Aggregate Bond Index increased 7.2%.
But, as previously mentioned, one must stay level-headed and consider the range of outcomes ahead. Yes, the Fed will likely cut rates next year. Also, earnings forecasts for S&P 500 companies look achievable. But stocks are not necessarily cheap right now, geopolitical tensions persist, deglobalization continues and the fight against inflation still needs to be completed (though meaningful progress has been made). Putting it all together, conditions warrant caution and patience as a soft landing by the Fed is possible, and any recession will likely be short and shallow.
Takeaways for the Week
Anticipating rate cuts on the horizon, every asset class has been positive since October ended, except oil. The biggest gainer was U.S. REITs, rising 20.6%
As of this writing, the S&P 500 is just 1.2% below its all-time high reached in December 2021
The U.S. 10 Year Treasury yield has plunged to 3.9% from a high of 4.9% in October as market participants predict between four and six-quarter percentage point rate cuts next year