Stocks closed marginally higher Friday following a stronger than expected U.S. jobs report, but all three benchmark averages declined to begin 2024. For the shortened holiday week, the Nasdaq Composite index slumped 3.2%, its biggest drop since September, while the S&P 500 fell 1.5% and the Dow Jones shed 0.6%.

At the end of 2022, everyone seemed to be planning for the recession they were convinced was coming. The economists and analysts at the biggest firms were predicting the S&P 500 Index was about to tumble and asked investors to prepare for a plunge in Treasury bond yields. Some even recommended buying Chinese assets instead. Together, these three calls—sell US stocks, buy Treasuries, buy Chinese stocks—formed the consensus view on Wall Street in early 2023. Everyone who followed that advice got burned.

2023 delivered investors far greater joy than broadly anticipated. The two factors that contributed to a strong 2023 were that investor pessimism was overblown coming off a dismal 2022 and inflation fell without a corresponding rise in unemployment. Classical economics teaches otherwise, asserting that inflation and unemployment maintain a stable and inverse relationship, scripting recession as the only cure for sizable inflation. With all signs pointing to a soft landing, the Fed may have pulled off a miracle against all odds and more importantly, defying basic economic theories such as the Phillips Curve.

What awaits us in 2024?

Future Wealth LLC’s View

2024 stock market performance will depend on three factors that the market is anticipating will happen – First, analysts expect S&P 500 earnings will rise 11.5%. Second, the Federal Reserve expects inflation to exit the year at 2.4%, and third, economists anticipate six interest rate cuts. Any of those alone would mark a bullish tone in the market. The prospect of all three explains the rapid and resolute rally in Nov and Dec of 2023. What 2024 will hold depends on correctly identifying the possibility of any or all of them occurring and positioning accordingly.

However, global markets have been spooked since the start of 2024 and there’s little sign that volatility will be reduced any time soon amid uncertainty regarding central bank rate cuts. But, it is a true statement that over the long term, stocks have returned roughly 6% from capital appreciation and 4% from dividends on a nominal basis. However, since inflation has averaged approximately 2.3% over the same period, real returns are closer to 8% annually. This is important to bear in mind – stocks are unlikely to provide us with double digit returns year after year and neither are we immune to the occasional double digit losses.

There’s an old saying in the stock market – “As goes January, so goes the year.” It implies that if the market goes up (or down) in January, it will continue to rise (or fall) for the rest of the year. Let’s hope that the old saying is as wrong as the economists and analysts were in early 2023.