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What’s in store for the market in 2024?

A look at how the market might fare in the months ahead.

By Ben Bakkum

Quantitative Investing Associate, Betterment |

Published Dec. 26, 2023

illustration of man reading map at postsign

What’s in store for the market in 2024? Dec 26, 2023 1:41:11 PM A look at how the market might fare in the months ahead. “Predicting is very difficult,” the physicist Niels Bohr once said. “Especially about the future.” With the benefit of hindsight, we now know that many of the predictions made about the economy a year ago missed the mark. Decades-high inflation, sparked by the pandemic, had pushed monetary policymakers to aggressively hike interest rates. Many analysts expected those higher rates to slow the economy, with a recession likely right around the corner. But thus far, the recession remains a mirage. And it may not feel like it, but broadly-speaking the economy did alright in 2023: Inflation slowed in the U.S., from 7.1% to 3.1% year over year1 U.S. stocks rebounded, up 23.9% in 20232 Employment remained strong 1Consumer Price Index data. Source: BLS, FRED, Bloomberg. 2CRSP U.S. Total Stock Market Index data through December 13th, 2023. Source: Bloomberg. For savers and investors, this illustrates the significance of not allowing short-term fears and economic tremors to distract from the discipline of allocating money to a diversified portfolio of financial assets and keeping an eye on the long-term. Just as deciding to sell stocks in 2020 due to the pandemic’s effect on the market would have caused one to miss out on the 2021 bull market, selling in 2022 based on recessionary fears would have prevented exposure to 2023’s gains. So once again: Predicting is very difficult. Yet now we train our eyes, humbly so, on 2024 and offer our analysis on where the market is headed. Reasons for optimism The Fed repeatedly raised rates over the last two years to slow spending and bring inflation back under control. So while rates remain high, inflation is looking better and, encouragingly, appears set to drop to the 2% annual rate targeted by policymakers. In fact, we think inflation has the potential to fall even lower when you look at housing costs like rent, whose spikes and dips take a while to show up in metrics like the Consumer Price Index (CPI). That’s not the same thing as saying prices are falling (deflation, in other words), but they’ve stopped increasing as quickly as they were before. Lower inflation, as a result, could lead to flat or even falling interest rates in 2024, potentially taking our foot off the brake of the economy and supporting growth. With inflation dampened, monetary policymakers would be less compelled to push borrowing costs higher to curtail demand—a shift that would support a longer runway for economic expansion. Benign inflation and relatively less restrictive financial conditions could also benefit the stock market in the near term, with expectations for continued consumer spending—and higher corporate earnings—fueling stock prices. Back in October 2023, for example, inflation came in surprisingly flat, leading one index made up of smaller companies to jump 5% in a single day. And for now, with interest rates at historically-high levels, bonds also offer opportunities for investors. Reasons for caution Yet the economy and markets still face risks in 2024. Something as large and unwieldy as the economy, and major actions like the Fed’s many rate hikes, can take years to be felt. For example: A recent study by the Federal Reserve Bank of San Francisco based on a range of global economies estimates that, four years after an unexpected 1% increase in a country’s policy interest rate, real GDP would be on average about 2% lower than it would otherwise be and 5% lower after 12 years. Because of this, it could very well be sometime in 2024 when economic activity starts to buckle under the weight of rate hikes that began in March 2022. Now we’re getting a little wonkier: The ongoing threat of a recession would weigh on market returns, but if inflation remains at current levels at the time it occurs and the government still runs a large deficit, monetary and fiscal stimulus in response to a downturn may not be at a scale hoped for by investors. In the event consumers pull back on their spending, expectations for corporate earnings that have supported the performance of the stock market (see Figure 3) would also suffer. The pricing power companies have recently enjoyed amidst the inflationary environment would likely erode, hitting their bottom lines as well, and potentially driving down stocks. So what now? The best plan of action during uncertain times is often no action at all. The risks associated with a down cycle exist alongside the opportunity of a growth cycle. Look no further than the last three years. The current elevated yields in bonds markets also offer opportunities for investors. If you find yourself sitting on too much cash, now might be the time to act and put it to work in the market. You can invest it as a lump sum, which research shows may offer higher potential returns over time. Or you can sprinkle it into a portfolio over time. (We make it easy to invest funds from your Cash Reserve account, either way.) And however the market performs in 2024, you should remain confident that investing can help you reach your financial goals in the long-term.

“Predicting is very difficult,” the physicist Niels Bohr once said. “Especially about the future.”

With the benefit of hindsight, we now know that many of the predictions made about the economy a year ago missed the mark. Decades-high inflation, sparked by the pandemic, had pushed monetary policymakers to aggressively hike interest rates. Many analysts expected those higher rates to slow the economy, with a recession likely right around the corner.

But thus far, the recession remains a mirage. And it may not feel like it, but broadly-speaking the economy did alright in 2023:

Inflation slowed in the U.S., from 7.1% to 3.1% year over year¹
U.S. stocks rebounded, up 23.9% in 2023²
Employment remained strong

¹Consumer Price Index data. Source: BLS, FRED, Bloomberg.
²CRSP U.S. Total Stock Market Index data through December 13th, 2023. Source: Bloomberg.

CPI-year-over-year-18-24

For savers and investors, this illustrates the significance of not allowing short-term fears and economic tremors to distract from the discipline of allocating money to a diversified portfolio of financial assets and keeping an eye on the long-term. Just as deciding to sell stocks in 2020 due to the pandemic’s effect on the market would have caused one to miss out on the 2021 bull market, selling in 2022 based on recessionary fears would have prevented exposure to 2023’s gains.

So once again: Predicting is very difficult. Yet now we train our eyes, humbly so, on 2024 and offer our analysis on where the market is headed.

Reasons for optimism

The Fed repeatedly raised rates over the last two years to slow spending and bring inflation back under control. So while rates remain high, inflation is looking better and, encouragingly, appears set to drop to the 2% annual rate targeted by policymakers. In fact, we think inflation has the potential to fall even lower when you look at housing costs like rent, whose spikes and dips take a while to show up in metrics like the Consumer Price Index (CPI).

rent-inflation-YoY-18-24

That’s not the same thing as saying prices are falling (deflation, in other words), but they’ve stopped increasing as quickly as they were before. Lower inflation, as a result, could lead to flat or even falling interest rates in 2024, potentially taking our foot off the brake of the economy and supporting growth.

With inflation dampened, monetary policymakers would be less compelled to push borrowing costs higher to curtail demand—a shift that would support a longer runway for economic expansion.

Benign inflation and relatively less restrictive financial conditions could also benefit the stock market in the near term, with expectations for continued consumer spending—and higher corporate earnings—fueling stock prices. Back in October 2023, for example, inflation came in surprisingly flat, leading one index made up of smaller companies to jump 5% in a single day. And for now, with interest rates at historically-high levels, bonds also offer opportunities for investors.

Reasons for caution

Yet the economy and markets still face risks in 2024. Something as large and unwieldy as the economy, and major actions like the Fed’s many rate hikes, can take years to be felt.

For example: A recent study by the Federal Reserve Bank of San Francisco based on a range of global economies estimates that, four years after an unexpected 1% increase in a country’s policy interest rate, real GDP would be on average about 2% lower than it would otherwise be and 5% lower after 12 years.

Because of this, it could very well be sometime in 2024 when economic activity starts to buckle under the weight of rate hikes that began in March 2022.

Now we’re getting a little wonkier: The ongoing threat of a recession would weigh on market returns, but if inflation remains at current levels at the time it occurs and the government still runs a large deficit, monetary and fiscal stimulus in response to a downturn may not be at a scale hoped for by investors.

In the event consumers pull back on their spending, expectations for corporate earnings that have supported the performance of the stock market (see Figure 3) would also suffer. The pricing power companies have recently enjoyed amidst the inflationary environment would likely erode, hitting their bottom lines as well, and potentially driving down stocks.

earnings-growth-CRSP-comparison

So what now?

The best plan of action during uncertain times is often no action at all. The risks associated with a down cycle exist alongside the opportunity of a growth cycle. Look no further than the last three years. The current elevated yields in bonds markets also offer opportunities for investors.

If you find yourself sitting on too much cash, now might be the time to act and put it to work in the market. You can invest it as a lump sum, which research shows may offer higher potential returns over time. Or you can sprinkle it into a portfolio over time. (We make it easy to invest funds from your Cash Reserve account, either way.) And however the market performs in 2024, you should remain confident that investing can help you reach your financial goals in the long-term.