Predictions Sure to Be Wrong - 2024 Edition
At the beginning of the year, I published my predictions that I knew would be wrong. I wasn’t admitting I was going to be wrong as a hedge, but I know that predicting the future is a fool’s game and I’m here for it yet again.
Here are the results of the 2023 predictions:
Prediction 1: The US will enter a shallow recession – WRONG
You’re probably thinking that the economy isn’t as good as being reported. While the vibe feels off, the economy is healthy. I’m trying to pin down why there’s such a divergence between mood and data but I have to rely on data here.
At the time, I wasn’t going out on a limb because everyone was convinced the US would enter a recession. That’s what typically happens when the Fed hikes rates and tries to choke the economy. Higher rates mean higher borrowing costs, which should lead to lower spending. What I didn’t account for was much of the debt had been locked in at a fixed rate.
Only 11% of consumers had debt that was susceptible to rate hikes. Couple that with pent up savings, higher rates really didn’t put a dent in consumer spending. Ergo, no recession.
As consumers continue spending, businesses have no reason to reduce their overhead, so the cycle continues.
Prediction 2: “Quality” growth companies will win the year – RIGHT
Playing the law of averages, good beaten down companies tend to bounce back eventually. The best performers this year were among the worst performers last year.
Nvidia sold off by over 50% and the Magnificent 7 sold off by 45% in 2022. Nvidia surpassed its recovery rally by more than double, the stock needed 100% to recover the loss of 50% in 2022.
The biggest reason for the outperformance this year was because of AI. And Nvidia has had the best year with 228% return through the end of November. It’s leading the Magnificent 7, who are collectively up 102% through the same time.
“Quality” in finance speak means sustainably profitable companies. Apple is an example of a high-quality company with low debt, healthy cash balance, and growing profits. To be clear, “quality” is not always in favor with markets. Sometimes the markets reward low quality companies.
Prediction 3: Bonds will hold up after a historically bad year – RIGHT
The 10-year treasury yield started this year at 3.5% and currently sits at 4.2% (end of November). As a result of the rise in rates, the aggregate bond index is up 2%. Consider the fact that yields jumped 20% and bond performance is positive.
The rise in rates not only caused a limited amount of pain, but it also created an opportunity for better yields for money markets, CDs, and bonds alike.
Now the 2024 predictions sure to be wrong:
Prediction 1: The rest of the market will catch up to the Magnificent 7
The equal weight S&P500 is up 5% through November, while the Magnificent 7 influenced cap weighted S&P500 is up 20%. There are 493 names in the S&P500 that might have their turn in the limelight. Earnings for the group have been ho-hum this year and could be setting up an earnings recession. An earnings recession means profits haven’t been living up to expectations and therefore future expectations are lowered. It is therefore easier to beat lowered expectations, which is what the market responds positively to.
There’s also relative value seen in midcap and small companies that are up 5% through November. The prospect of an inevitable recession doesn’t seem so inevitable anymore. The economy is slowing but there are no red flags at this point. Inflation continues to trend down, and the Fed will respond by pausing hikes.
Prediction 2: The Fed will not cut rates but rather pause
In a statement seemingly riddled with technicality, there’s a massive difference between cutting and pausing rates. Inflation looks stubborn at 3% and that’s well above the Fed target of 2%. Two things need to happen for a Fed pause. Continued slowing inflation that’s persistent enough to keep rates higher and an economy that stays above water.
I know prices are high, but we’ve established the Fed is more interested in price stability and not price level. Cutting rates too early can rekindle inflation. Hiking rates too deep into a cycle can make a recession more severe.
The economic growth of the US has been mostly driven by the might of the consumer. Americans have been able to tap into their savings and haven’t slowed spending. This will keep the economy flat to slightly growing. If it stays in this idle stage, it doesn’t give the Fed reason to hike further.
Pausing rates means the Fed is waiting for the lagged effect to catch up. All those people who haven’t been impacted by higher rates could start to see the need to turnover some of their debt at higher rates. Mortgages are pretty much locked if homeowners were lucky enough to get 3.5% or lower.
Prediction 3: The US dollar will weaken, finally
A weakening currency is not always a bad thing. I repeat. A weakening currency is not always a bad thing.
Americans travelling abroad enjoyed the benefits of a strong dollar. An American company selling overseas has mixed feelings about a strong dollar. Foreign manufacturers love a strong dollar.
If the dollar weakens, the purchasing power of an American travelling abroad goes down. That American company selling overseas may see a boost in sales volume as foreign consumers suddenly experience greater buying power. Disneyworld might see an uptick in visitors after a summer of weak attendance. If you thought Disneyworld was expensive as an American, imagine how expensive it is for a European visitor.
The fundamental reason the dollar would weaken is the Fed pausing rate hikes, making it less appealing to save in dollars. If interest rates from global currencies become more appealing by paying more interest, investors should start parking their money in non-US currency.
This prediction has perennially been wrong because currency strength/weakness relies on economic and political stability in addition to interest rates. That’s been much more difficult to predict. No one predicted Russia would invade Ukraine. No one expected Hamas to attack Israel. Geopolitical randomness makes it hard to predict currency moves.
How about a 133% interest rate bond? Buying an Argentinian bond yields that much but their inflation rate is 150%, yielding a net loss of 17%. Inflation is so bad for the Argentinian peso that the country is going to be pegging to the US dollar for stability. Any currency instability means a country might look to the dollar, thereby further strengthening it.
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