2023 was meant to be a terrible year for investors. We were expecting a nasty recession driven by higher interest rates. This was going to lead to high unemployment, negative earnings revisions and a tough time for stock market investors. It turned out to be one of the best years of all time! What does all of this mean for 2024?
2023 Expectations
Last year, economists predicted a year of very low growth driven by higher inflation for 2023. As you can see from the charts below, higher interest rates were expected to crush global economies driving unemployment up and slowing economic growth.
With this economic backdrop, 2023 was expected to be a tough year for the investment markets.
Source: Factset, consensus estimates as of 31 December 2022
Reality vs. Expectations
For the most part, predictions for 2023 were off. Economic growth turned out to be significantly higher than expected, particularly in the US market. Europe also did a lot better than expected, with the UK brushing off the impacts of the energy crisis.
Higher than expected growth led to a lower-than-expected unemployment rate. At the same time, interest rates have moved higher than expected. Unfortunately, inflation has stayed higher than expected as well.
Source: Factset, consensus estimates 31 December 2022 versus current estimates
This performance differential was driven by a much stronger Consumer
2023 predictions underestimated the impact of a very strong consumer with lots of cash - a consumer that was locked up at home for 2 years post-COVID and had received a few stimulus cheques (in parts of the US and in Europe). That build-up of cash has slowly been declining over the last year.
Monetary Policy Lags
Another issue that wasn’t accounted for in these predictions is what is called the long and variable lags of monetary policy. In essence, this is the time that it takes monetary policy, such as higher interest rates, to begin to affect the markets. Corporations also did a good job of terming out their debt between 2020 and 2022. All this means that we have yet to see the massive reduction in earnings and rise in unemployment that we expected to see in 2023.
What did this do to the markets
The stronger economy flowed through to equity markets. The year-to-date returns across most markets have been exceptional. As of November 28th, the S&P 500 is up 20%, the Russell 2000 is up 4%, and the Nasdaq is up 37%. Much of the growth seen in the S&P 500 is driven by tech stocks who experienced massive recovery in 2023, despite a tough year in 2022.
Source: Factset
New Zealand in 2023
On the other hand, we’ve had a tough year here in New Zealand. We are one of the only markets in the world - apart from China - to end down. This is primarily due to New Zealand’s stock market being driven by interest rates (70% of the markets are linked to interest rates).
Dividend stocks did extremely well in a falling interest rate environment – where people started to look for equities and dividend yields to supplement their incomes. Now, the 5 to 7% earnings on bonds make it hard for equities to compete – particularly as bonds are often seen as a safer asset.
Interest Rates
Interest rates have been extremely volatile over the last year, and we have been stuck in a narrative ping pong: one day we’re told that we’re headed for a soft landing and inflation is over. The next day we’re heading for hard landing and recession.
As such, there’s a high level of uncertainty surrounding the markets about where we are and where we’re going. This is despite interest rates being similar to the end of 2022 – although they have come down approximately 75 basis points from their peak in late October.
The movement in global interest rates has flown through to New Zealand as well. As you can see from the chart, interest rates have fallen sharply with banks now forecasting recession. Banks are now forecasting the OCR (Official Cash Rate) to start falling in 2024. The fall in interest rates is expected to come through to those 2-to-5-year mortgage rates shortly.
Source: Factset
2024 Economic Forecast: Navigating a Landscape of Slowing Growth, Rising Delinquencies, and Potential Political Shifts
The possibilities for next year are very broad, and we also need to be reminded about how wrong we got 2023. Given the very uncertain economic times, it is challenging to be confident about what comes next.
Similarly, to the expectation 12 months ago, economists expect growth to slow, unemployment to rise and inflation to come under control. We can potentially be more confident in the prediction this year, given we are already starting to see many of these things play out. For example, we’re seeing unemployment starting to rise and consumer spending beginning to slow on a global level. We’re also starting to see a rise in delinquencies and a rise in spending on credit cards.
Source: Factset, current estimates versus forecast estimate as at December 2024
New Zealand 2024
It’s hard to not see New Zealand going into recession from here. The employment market is tightening, and we have more people on short-term fixed mortgages, this means we have a consumer that’s hurting more than in other parts of the world. On top of that, we have had a significant slowdown on our commodity exports over the last 6-9 months.
On the flip side, the one thing that might help us is the strength of migration. This influx of 120,000 people over the year will help buoy our economy overall. Effectively, this means we are likely to see a personal recession – people will get poorer, but the economy will continue to grow at a total level.
For highly indebted mortgage holders, relief is on the (distant) horizon. We would expect mortgage rates to start falling early in the new year. Wholesale rates are already down 0.75%, so technically mortgage rates should already be 0.75% lower.
Housing Market
Great news for sellers and bad news for housing buyers; we expect the housing market to pick up, with migration of 120,000 new people entering New Zealand our housing shortage will continue to grow.
Combining immigration, lower interest rates, and investor friendly government policies. I it’s hard to see that not boosting the housing market. Over the next couple of years, a fear of missing out may overwhelm buyers’ fears of overpaying.
Disclaimer: The views and opinions expressed are those of the author Rupert Carlyon, the content provided in this article is intended as an overview and as general information only. Additionally, these are high-level predictions. Please don’t use them to make investment decisions. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion, and seek independent guidance.