“It’s tough to make predictions, especially about the future.” – Yogi Berra
Around now is the time we at WJ are bombarded with end of year recaps, and next year’s predictions from various investment firms. Though we know these predictions will almost certainly be wrong, it’s important to get a read on what the general mood is amongst the investment community. It tells you what may be priced into the market, and sometimes a prediction will force you to reconsider your own position if there is a sound argument for it. But mostly it’s entertaining.
I’d like to start a similar practice, where I jot down how I think things will unfold in the coming year, and at the end of the year, I’ll publish how I did. One note I’ll add to each prediction is how in or out of consensus I think it is. I’ll rank each prediction as being Mainstream (if its widely held), Balanced (if it’s somewhere in the middle) and Bold (if it’s contrarian).
First a couple important caveats we have to get out of the way:
- This is my personal opinion, and not reflective of anyone else at WJ, or WJ itself.
- We don’t make investment decisions off of short-term predictions, and you shouldn’t either.
2024 PREDICTIONS
2.5% Inflation (Balanced): The last 6 monthly inflation numbers have averaged just over .2%. Within the index, it’s been a mixed bag of declining energy prices helping the number go down, but inflated housing hurting. Housing inflation will continue to decrease due to the way it’s measured, which is significant because it’s about a 3rd of the index. I don’t see oil changing much from here. So I think using .2% increases going forward is appropriate. If that’s the case, CPI will be about 2.8-2.9% for the first half of the year, and fall to about 2.4% in the back half of the year.
2.5% GDP Growth (Balanced): The last 6 quarters of real GDP have averaged about 3%. This is coming off the heels of two consecutive negative quarters, which some view as a recession, although it has not and likely will never be formally labeled a recession. It’s likely that nominal growth slows down as spending continues to moderate, however, if inflation also comes down, real GDP will stay in the same range (slower growth but lower inflation offset). Obviously, this forecast means no recession.
Interest Rates Won’t Change Much (Balanced): Given that inflation and growth will both be moderate, I wouldn’t expect large changes in the long end of the curve (10 year treasury and up). It’s currently around 4% and that’s roughly where I think it should be. However, I would not be surprised to see a bond rally mid-year (meaning yields get in the low 3s) as the Fed cuts rates, but I think this would be brief. The short end should be closer to 3% in my opinion, however I’m now sure how feasible that is with the fed funds still at 4-5% or more.
Mortgage Rates near 5% (Bold): Mortgage rates are a different story, however. Currently the 30-year mortgage (around 6.7%) trades at an almost 3% spread to the 10 year treasury. Historically, this spread is usually about 1.5%. There are various reasons for this, but one is simply bond volatility is at relatively extreme highs. As this moderates over the year, this spread should come in. Assuming it gets to 2% (rather than 3% currently), and the 10 year rallys a bit with declining rates, we could see mortgages in the mid to low 5s.
Bonds Will Return Their Yield (Mainstream): Considering that I don’t expect yields to fall much, I think you’ll earn the yield. So 4% for treasuries, 5-8% for various credit bonds.
Good Year for Stocks, and Current Winners Keep Winning (Bold): Stocks had a great 2023 (especially US stocks up 26%), but this was coming off a bad 2022. Good years tend to cluster, and stocks usually don’t crash unless there’s a recession. Given that I don’t expect one, 2024 should be another good year. For US stocks, a typical up year is about 15% (the long-term average is 10%, but that includes large down years). Stocks outside the US are much cheaper, but in the short term that doesn’t really matter. So, absent some sort of catalyst, I think it’s better to assume that the momentum of recent winners continues. I don’t see any catalyst absent aggressive regulation that should keep the mega cap companies (Apple, Microsoft, Google, etc.) from outperforming. At some point I think there will be mean reversion, but I wouldn’t expect it to occur in a “good” economic year.
Home Prices Strongly Increase (Bold): There’s a lot of pent-up demand, especially from family-forming millennials, that have been waiting for housing supply to heal and interest rates to go down. Homeowners have been hesitant to sell, as they’d be trading in a 3% mortgage for a 7-8% mortgage. At some point, however, life goes on and you need to move to satisfy your needs. Sellers will bite the bullet and buyers will be waiting. As most sellers are also buyers of a different home, this alone won’t cause prices to change much. So it’s about the marginal buyer/seller. I believe the marginal buyer are those sitting in an apartment waiting for rates/supply to heal, and they’ll bid up prices.
Apartment Rents Fall (Balanced): If the above is true, and many apartment renters are waiting to move into a house when affordability is right, this could cause a continuation of rent stagnation and even declines. This is made worse by the fact that there is a large amount of supply (new apartments) hitting the market in 2024.
Bitcoin to $50k (Balanced): The Bitcoin (BTC) ETF just came out, and in the following few days, BTC fell about from 48k to 39k. This by itself wasn’t that surprising. The ETF approval was widely anticipated, and its common to sell into good news. Going forward, the big news of 2024 is the “halving”, which happens every four years. This means the reward for mining bitcoin is being cut in half, which will limit new supply. Limited supply means increased price all else equal, so BTC fans are bullish on this event. Indeed, the last 3 BTC halvings were the end of 2012, mid 2016, and mid 2020, and they were followed by major rallies in the price of bitcoin. HOWEVER, these were also exceptionally good times for stocks, particularly growth stocks. I believe the price of bitcoin is mostly a proxy for investor risk appetite. If risk taking is strong, you’ll see it in stocks, and consequently in bitcoin. When stocks fall, bitcoin falls further, despite the fact that they should have nothing to do with one another. Given that I expect a good year from stocks, I think BTC will have a good but not extreme year. Lets call it 50k. This is also the prediction I have the least conviction in as BTC is extremely volatile in both directions.
2024 Presidential Election (Balanced): Barring additional legal issues for Trump, or Biden withdrawing from the race, we’re looking at another Trump vs. Biden race. Biden would be the odds favorite. First, incumbents are historically harder to beat. This point is weaker now than in most years because Biden’s approval rating is low. However, given my above economic forecasts, it will be a decent couple years leading up to the election. “It’s the economy, stupid” is a catchphrase coined by James Carville, a political strategist in Bill Clinton’s successful 1992 election. Despite the geopolitics, trouble at the border, and the large fiscal deficits that currently hurt Biden’s appeal, the economy is good and should continue to be good up to the election. This will likely be what Biden runs on, and it’s a hard message to beat.
