If the 2024 economic and investment landscape aligns with Commonwealth’s outlook, investors could have a good year, according to Brad McMillan, the Waltham, Mass.-based advisory’s chief investment officer.
Commenting on Commonwealth's new 2024 outlook report, McMillan said in an interview that the company is expecting that by the end of 2024 that inflation will hover around 2.5% to 3%, GDP growth will be at 3.75%, the Fed funds rate at 4.75% to 5%, the 10-year U.S. Treasury yield at 4% to 5%, and the S&P 500 to land between 4,700 and 4,800.
“We are reasonably optimistic about the economy. As long as job growth remains fairly robust, in keeping with pre-pandemic levels, we’ll see the economy expand,” he said. “If we get stronger than expected economic growth and Fed cuts, that would be the upside scenario.”
U.S. Economy
Looking first at the U.S. economy, Commonwealth’s Outlook 2024 report predicts that low unemployment and higher salaries will enable the American consumer to maintain its spending levels, and this will contribute 1.5% to the national GDP.
“We expect a Goldilocks economy—one that offers full employment, economic stability, and moderating inflation,” the report said. “This foundation will offer an ideal state for the financial markets and keep the bears at bay.”
The biggest risk to this outlook would be a breakdown in consumer confidence, perhaps due to a rise in unemployment or a surprising surge in inflation. But McMillan said he thinks this is unlikely.
The report stated business investment will add 1.2% to the economy, net exports 0.25% and government spending 0.80%.
“I think 3.75% growth is great. It reflects consumer demand, job growth, and confidence. We’re going to see a combination of consumer spending growth along with continued business investment. And substantial investment in manufacturing,” McMillan said. “And manufacturing investment adds a host of different benefits. Besides the products, there are the jobs.”
Inflation and Fed Rates
Both inflation and interest rates have been major drivers of market performance for 2023, and Commonwealth expects that to continue in 2024.
When the Fed signaled at its last meeting that three rate cuts could happen in the second half of 2024, the equities market rallied on the news. But McMillan said all the market gyrations around “when” and “how much” those cuts will be are misplaced.
“When and how much are the wrong questions,” he said. “The question is why? Why would the Fed cut rates?”
If job growth remains strong and inflation stays above the Fed’s target, the Fed would not cut rates, he said.
“They’re not going to want to cut until the job market weakens,” he said. “The jobs market is the canary in the coal mine.”
Investment Markets
Putting aside the stellar performance of the “Magnificent Seven”—Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla—equity performance has been lackluster in Commonwealth’s opinion.
For example, the small-cap Russell 2000 was up about 4.2%, and the S&P 500 Equal Weight Index was up just 6.56% after a strong November rally. Meanwhile, the S&P 500 was up 20.80%, primarily on the backs of the Magnificent Seven.
“Large-cap growth companies have been leading the market, and other asset classes have been left behind. Is that outperformance going to continue? It may, but there’s already a lot of good news priced into large-cap growth in general,” McMillan said. “What we’ve historically seen is one sector outperforms one year, but then another sector catches up. Are large-caps really going to grow another 30% or 40%, next year?”
That’s not to say investors should sell their M7 shares, he continued. “These companies are highly priced but enormously profitable and not going away. It’s hard to want to jump off a moving train,” he said.
But more attractive investment opportunities will be found in asset classes that have underperformed in the last few years, such as value, small-cap and international, the outlook report said.
That said, each of these areas also have significant challenges. Value stocks, for example, tend to be cyclical and need an expanding economy to perform well. Small-cap companies tend to carry more floating-rate debt than larger companies, and refinancing that debt can strain cash flow. And international economies are also battling inflation pressures, the report said.
Politics and Policy
As the U.S. heads into a presidential election year, the political capital that is gained for either bashing the economy or propping it up may prove irresistible to candidates. But McMillan said if the economy continues its upward trend, American voters may be hard to manipulate next November.
“When you look at consumer confidence in election cycles, there’s a deep bifurcation of perceptions based on politics. But if you look at the at objective facts, there’s a disconnect,” he said.
The major influences on consumer confidence tend to be the unemployment rate and gas prices, and those are felt by consumers on a 12- to 18-month lag, he said. Right now, both are low compared to where they were a year ago, but consumers are just beginning to feel more positively about them.
“Because of that lag we expect consumers to feeling the peak of the improvements in the economy through next year,” McMillan said. “If that relationship holds, we should see consumer optimism continually improve, with people getting more cheerful closer to the election.”