85% of economists predicted a recession in 2023, so did most CEOs and everyone on Wall Street. Their almost unified approach was to sell US Stocks, buy bonds, and buy Chinese stocks. All three were wrong: US Stocks did well; bonds caved; Chinese stocks cratered. What does that tell us about 2024 and beyond? In our opinion, it tells us a lot. The large majority were convinced there was going to be a recession and their investment calls were based on the “coming recession of 2023”. At Adams Financial Concepts, we have for over two years, said the chance of a recession was very small.
Albert Einstein said that the speed of light in a vacuum was constant. No matter who measured, or where it was measured, it would always be the same. That is true about the laws of physics, chemistry, and biology. Wall Street and economists seem to apply the same logic.
I was invited to a presentation by one of the best Wall Street prognosticators. Yes, he had been wrong last year, but the recession was going to happen in 2024. After all, the Federal Reserve had raised interest rates, and the yield curve was still inverted. Not only was the United States headed for a recession, but that recession would last for the same length of time the yield curve was inverted. The recommendation was to load up on value stocks and even more so on seven-year maturity bonds.
Those gurus who continue to predict recession elevate past economic event status to the same constant that Einstein did for the speed of light. 100% of the time, in the past when the yield curve inverted, it was followed by a recession. The same has been true of the Federal Reserve raising interest rates. If it did not happen in 2022 or 2023 then they think it will in 2024.
But as we have been saying at Adams Financial Concepts, the times are really different. The world was coming out of a pandemic. People had sheltered in place and had received stimulus checks. In addition, the Fed said there were 4 million more jobs than there were workers to fill those jobs. In the past, when the Fed was raising rates there were widespread layoffs and more workers than jobs. Economic activity was slowing, unemployment rising, and wages falling. Just the opposite has been true in 2022 and 2023. Fourth quarter GDP is estimated to be 5.6%!
What does this mean going forward into 2024?
Inflation: Inflation was the theme in 2022 and in 2023. It will very probably be the theme of 2024 and could be for the rest of the decade.
There is wide consensus that the Fed is going to be lowering interest rates. Inflation has come down, and while it might not reach the goal of 2% in 2024, most economists and Wall Street feel rates will be down. At AFC, we also believe that to be the case, as much because there will be considerable political pressure from the administration for political gain.
While inflation has come down, it will probably continue for a few more months. Our concern is that we feel inflation will probably begin to rise later in the year. “Demand Pull” inflation happens when there is more demand for goods and services than there is supply. An example of that is what happened in the used car market in 2022, when a shortage of used cars caused prices to catapult upward. As COVID ended, there were a number of shortages and inflation surged upward. As supply has returned, price increases have fallen, and it seems like the Fed is managing a soft landing.
“Cost Push” inflation happens when wages and material costs rise, pushing up prices. The United States created 2.7 million jobs in 2023, and 3 million people joined the workforce. Wages rose 4.6% in the 12 months ended September 2023. That compares to around 2.5% pre-pandemic. Inflationary pressures increase when wage growth outpaces productivity. Productivity from the end of 2019 through the second quarter 2023 was just 1.2%.
Almost every major corporation is seeking automation to offset worker shortages. In addition, there is concern that for many large corporations, productivity has been lost because of employees working remotely.
As a rule of thumb wage increases have twice the impact as materials in cost push inflation. The inflation surge in the 1970s was driven by oil prices surging in reaction to OPEC’s oil embargo. In 2024 and going forward, wages could be driving inflation with greater force than experienced in the 1970s.
President Harry Truman would say he would like to find one-handed economists. The reason? Because economists would often say “…on the other hand”.
We believe there is a definite possibility that inflation will gradually fall during the early part of 2024, but bottom and begin to increase later in the year. If inflation does begin to increase, the Fed will once again begin to raise rates. This time, the Fed may have to continue to raise rates until there is a recession where job creation becomes negative.
Stock Market: We believe the stock market will probably do well in the first half of the year, but will be vulnerable if there is a shift in inflation as the year winds down. We expect there will continue to be more jobs than workers to fill them. Wages will increase, and companies will be raising prices to accommodate the increasing wages.
If this scenario unfolds as we expect inflation will pick up later in the year. In most years, the Fed would begin to raise rates when the Personal Consumption Expenditure Index (PCE) begins to show more inflation. However, 2024 is a presidential election year. There will be significant pressure put on the Fed to keep from raising rates until after the election.
Once the Fed begins to raise rates, we would expect most of Wall Street and economists will look back on 2022 and 2023, when they so misjudged the impact of the Fed raising rates and the inversion of the yield curve. They will remember there was no recession. We expect few will forecast a recession. As they were wrong in the last two years, they will probably be wrong again. Our expectation is, if the Fed is forced to raise rates to control inflation in 2024 and beyond, the Fed will have to push rates high enough to cause job creation to be negative. This time, the Fed will probably push the economy into a classic recession.
All of that to say, that the stock market should do well early in the year, but as the year unfolds toward the election, it will be a stock pickers market, just as it was in the 1970s. In the 1970s, both bonds and stocks, in general, cratered. But there were stocks whose prices did increase during that time.
Should the scenario of reignited inflation play out: Success will be in finding those stocks that will increase in spite of inflation.
Bonds: If our scenario plays out with inflation increasing late in 2024 and beyond, bond yields will increase the price of bonds will sink. In the 1970s, long maturity 4% AAA bonds fell as low as 35-40 cents on the dollar. Short-term bonds could not keep up with the pace of inflation. Bond holders lost money whether short or long-term.
We have been cautioning about this type of scenario since 2016. The 1960s and 1970s were unkind to both stocks and bonds. The stock market, as measured by the S&P 500 index, took 32 years to catch up to the damage caused by inflation as measured by the Consumer Price Index. We are not sure that bond returns ever caught up to the CPI.
IT IS NOT ALL NEGATIVE: As we face what might be a decade of rising inflation today, what lessons can we take from the 1960-70s period? For us at AFC, we see that there were individual stocks that did very well from 1966 to 1981. We seek to understand what those businesses had that gave them an edge over everyone else in the market.
$100,000 invested in McDonalds in 1966 would have grown ten-fold to $1 million by 1981. But who in 1966 really believed that a small drive-up restaurant selling 19 cent hamburgers would change the world of dining? Today, McDonalds is a household name. $100,000 invested in Arrow Electronics would have grown to over $2 million, but who would have believed a local store in Colorado which sold used radios in 1966 could expand to a billion-dollar major electrical components distribution business. But they realized the potential of the transistor and did by 1981. Advanced Micro Devices dropped from $30 per share to $10 and then began to rise to over $300 (split adjusted) by 1981. Did it really matter whether a person bought at $30 or $10 when the stock continued to rise to $1756 (split adjusted) by 1984? Some of the stocks that did very well had down-draws of over 70% in their early days.
We believe that it will be a stock picker’s market. It will be finding the right stocks and holding them for a number of years.
Mike Adams, President & Principal
Adams Financial Concepts LTD
1001 Fourth Ave, Suite 4330, Seattle WA 98011
Hozzászólások