As the last installment of Karat Stick for 2023, I figured we could peer through the time telescope to see what 2024 may have in store for us. Fair warning, this telescope more resembles a kaleidoscope, projecting an image that’s constantly shifting the more input I provide.
You would think that forecasting the future would be a mission critical component for financial success. To some extent, this can be true. We do need to place our bets on more winners than losers, but without precise information it is impossible to isolate the winners from the losers. By “winners”, I refer to those single outperforming investments or those periods of outperformance. Hence my point last week on diversification.
Do not conflate the economic micro and the macro. At the aggregate, the trajectory of human progress as measured by technological advancement and standard of living is decidedly progressive. This has been the case since humans harnessed fire. Each of the points below isn’t enough to move our economy in one direction or the other on its own. Don’t get lost in the forest by focusing on a single tree.
Prediction # 1: The most predicted recession ever does not arrive.
Most of Wall Street was forecasting a recession for 2023 going into the year on account of the Fed’s rapid pace of interest rate hikes. The recession never materialized, likely because of the massive surge in M2 from the 2021 and 2022 stimuli. The M2 excess, while declining from its peak, is still relatively high which supports an active consumer. Furthermore, the US government quite literally does not have a debt limit imposition until January 2025. Good news for equity investors!
Prediction # 2: Concerns surrounding LLMs and cybersecurity in general will reach a fever pitch, penetrating the global Zeitgeist.
Tired of the A.I. nonsense? Too bad. It’s just starting. Large language model adoption seems poised to accelerate and the technological impacts will likely have unintended consequences. One such consequence could be a ramp up in cybercrime, or fears thereof. We can expect congressional hearings, doomsday prophets, and regulatory response to this issue in 2024.
Prediction # 3: Bitcoin goes mainstream with a spot price ETF.
For 10 years, financial service companies have been attempting to launch an exchange traded fund (ETF) directly tied to Bitcoin. The SEC has yet to approve one, citing concerns over potential market manipulation, liquidity, and valuation issues. A recent Federal court ruling seems to have shifted the tide in favor of financial institutions and the prospect of a Bitcoin ETF is a matter of when, not if. I think this seems likely for 2024, despite the recent calls in congress to scrutinize the asset through regulation.
Prediction # 4: Not much change in Washington
This election demarcates a crisis point in America! So we’ve been told literally every election cycle. Relax folks, America survives and probably thrives regardless of the election outcome. That said, it impacts investors’ emotions and therefore how committed they are to their investments. Barring a recession or some other major negative event similar to the 2020 pandemic, the incumbent president is likely to be favored. The House and the Senate may flip flop, but the odds are we continue to have a divided government. This is not necessarily a bad thing. The best stock returns, historically, occur when we have democratic representation.
Prediction # 5: Interest rates stay elevated for longer than expected.
There has been a lot of talk on Wall Street that the Fed ‘pivot’ is imminent. Fixed income futures are priced for rate cuts as soon as March, 2024. While it is possible that cuts could happen this soon, we believe the pace will be slower than expected and may occur later. The PCE, the Fed’s preferred measure for inflation, is still above the 2% target with a current reading of 2.6% annualized. Thankfully, disinflation being the current trend makes further rate hikes unlikely. Reinflation spikes are historically precedented, so I think the Fed will play this one safe staying higher for longer.
While consequential in the near term, none of these predictions should influence your investment policy. Investors should pick a sensible allocation for their situation and then ignore it. There are shortcuts to success and sometimes we manage to find them through good governance and luck.
Most of the time we achieve progress and learn from our failures. Even Yoda understood that “the greatest teacher, failure is.” Do not become jaded by short-term disruption and keep your focus on what is real. 2024 is an election year and every political candidate wants to tap directly into our limbic system to shape your views.
Here’s a reality no one can change and is also my most certain prediction: nearly every person on earth will strive to make their lives better day in and day out. Naturally, even though the endeavor is selfish at the individual level, this will lead to progress overall. Don’t forget this.
Merry Christmas and Happy New Year!
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
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