Last week we published our recap of the year 2023. This week we want to share with you our 2024 Economic Outlook.
If you’re a regular reader of our newsletter, you know that we believe “projections” are not a science and, to be frank, have proven to be, well… pretty much worthless practically speaking. Nonetheless, it is always a good practice to assess our current economic situation and be aware of what those things COULD lead to in the coming year. Because we never know for sure, we always recommend taking a balanced approach to the allocation in your portfolio. To put it another way, never buy too many poodles. (If you don’t know what I mean, check out last week’s blog.)
Every year has it’s challenges, but here are three of the main things we are watching for 2024.
Inflation and Interest Rates
In 2021 and 2022, inflation got a little bit out of control. The supply chain issues caused by Covid coupled with the massive amounts of “stimulous money” deployed during and after Covid, led to dramatically increasing prices on just about everything.
In an effort to slow down inflation, the Fed started increasing interest rates in March of 2022. The Fed’s job is to try to regulate the economy. If the economy gets too hot then it starts to overheat (which is what we saw a lot of in 2022). The Fed has been working hard to cool things off, but this is an art and not a science.
Late last year it looked like the plan to “cool” the economy was working. Inflation in 2023 was about 3.1%. The Fed is hoping to get inflation down around 2%.
The Effects of Interest Rate Hikes on the Economy
It takes time for the full effects of interest rate hikes to be felt in the economy. In fact, some economists estimate that it takes about 12 months before the full effect of an interest rate hike is revealed. The last interest rate hike that the Fed made was on July 26th, 2023. So in theory, we won’t really know if the Fed raised rates a little too much, or not enough until about July of 2024. Right now, investors think that the Fed might have raised them a little too much. Investors are betting that the Fed will actually have to lower rates again in 2024.
That said, the market will probably be very sensitive to data (like higher than expected inflation) that indicate that the Fed needs to instead raise rates.
Interest rates affect MANY areas of the economy – they affect companies’ ability to borrow money and grow their businesses, they affect the mortgage rates and consequently the housing market, they affect bond prices. Generally speaking, when interest rates are rising (like they have been since 2022) bond prices suffer. We are probably nearing the end of interest rate hikes, so we’re anticipating that bonds will look a little better in 2024. The housing market and stock market will both appreciate an end to the rate hikes as well. (Read more about How Interest Rates Affect the Markets here)
The Election
Here’s the reality: history has proven that when you compare periods of time when Republicans are in office to times when a Democrat is in office, there is no significant difference in the performance of the stock market or the health of the economy. But, Democrats think that their political views are best for the economy and Republicans think their policies are best for the economy.
There is much more than could be said about this, but the bottom line is that investors are made up of both Democrats and Republicans. In an election year, we generally expect to see more volatility in the market as the parties battle it out.
The U.S. Fiscal Problem
Every year the Congressional Budget Office publishes projections on the federal budget and economy over the next 30 years. Suffice it to say that the current outlook isn’t great and each year it tends to look worse.
The U.S. has a debt and spending crisis. Eventually we will have to pay the proverbial piper. Currently, federal debt held by the public totals about 98% of the country’s GDP (the total amount of goods and services used by the economy as a whole). According to the latest report, debt is estimated to rise to 181% of GDP by 2053. You can read the full report here.
So what does all of this mean to you? In order to make the future outlook better, we either have to grow the economy (increase GDP) or lower the debt. Better yet if we can do both! As a country, we probably need economic growth and reform. Growth is generally good for investors. Reform could look a lot of different ways.’
Without both growth and reform, there could be serious impacts to the economy… probably not this year or next year, but eventually the government may be unable to borrow during times of war or crisis (like the pandemic). This could also lead to more credit rating downgrades from ratings companies.
If and when we get reform, Impact Wealth Management will be assessing the implications to our clients’ personal situations and communicating relevant information. This is one reason it’s important to work with a financial advisor who also does tax and estate planning.
Our Commitment to Our Clients
We are committed to staying on top of the changing market and economic conditions. We want our clients to feel confident of that. We distill information from multiple sources that we trust.
While it’s good for you to stay informed about what’s happening around you, we want our clients to be free from the need to stay glued to CNN or Fox News all day. Remember that media outlets get great ratings by instilling fear and anxiety in their viewers. Our quality of life decreases according to the hours we spend consuming news from mainstream news outlets.
We are on the 2024 journey together! We are always here to chat anytime you have questions or concerns. If you’d like to have our blogs delivered directly to your email inbox, subscribe by sending us your email address (or fill out the form at the bottom of our home page)
From all of us at Impact Wealth Management, we wish you a 2024 filled with happiness, laughter, and minimal amounts of news consumption.
Impact Wealth Management LLC is a fee-only Registered Investment Advisor (RIA). We are based in beautiful Sioux Falls, SD and regulated by the State of South Dakota. Throughout this site, we went out of our way to present unbiased data believed to be from reliable and respected sources. However, its accuracy, completeness, and relevance are not guaranteed, and no responsibility is assumed for errors or omissions. Always consult your financial professionals before implementing an investment strategy. And remember the age old financial advice: past performance is no guarantee of future results.