2024 Outlook

The Fed: From Foe to Friend

While it appears 2023 avoided what many prognosticators called “the most anticipated recession in history,” recession risks entering 2024 haven’t disappeared. Although economic data is improving off its lows, the risk of recession is still elevated.

Volatility could also increase as we enter an election year and geopolitical unrest remains in Europe, Asia, and the Middle East. Additionally, an economic slowdown could be prolonged and even deepen if the Federal Reserve (Fed) is slow to cut interest rates when inflation is under control.

A Friend in the Fed?

While mistakes are possible, it is more likely the Fed will end up being a friend in 2024 and, if an economic slowdown materializes, they would likely cut rates which should act as a backstop for markets. The general sentiment is anticipatory of rate cuts, including the Fed’s own dot plot which projects a lower federal funds rate by the end of next year.

A Friend in the Fed?

Roaring ‘20s?

While our Outlooks typically cover what we expect in the coming quarter or year, investing is typically done with a longer horizon in mind. The good news is the stage is currently set for long-term growth. That growth may not happen for a couple of years, but in the interim we may see certain themes develop. Timing these developments can be difficult: there can be setbacks along the way, and sometimes they develop so slowly you don’t necessarily notice them until it’s too late.

As the name implies, baby boomers created a surge in the population when they were born. But since then, population growth has slowed, and baby boomers are hitting retirement at an increasing rate. From January 2000 to September 2023, the population of those over 55 years old increased by 75%, or 42.8 million. Over that same period, the population of 25–54-year-olds (prime-age workforce) only increased by 6.5%, or 7.8 million. This has many implications, especially for the labor market.

With “Help Wanted” signs seemingly everywhere, and more job openings than people looking for work, one might question where all the workers went. In part, they retired, which is good news for them, but when paired with slowing population growth it creates a disparity that’s bad news for economic growth. This isn’t just a problem for the U.S.—it affects most developed countries, and it’s not going away any time soon. The silver lining is that with challenges come opportunities.

U.S. Population Growth Since 2000

Source: Cetera Investment Management, Federal Reserve Bank of St. Louis, U.S. Bureau of Labor Statistics. Data as of 9/30/2023.

Shorter-Term Implications of Low Population Growth

One opportunity came in the form of the CHIPS and Science Act, passed by Congress in August 2022 and providing roughly $280 billion in new funding to boost domestic research and manufacturing of semiconductors in the U.S. The race for artificial intelligence to boost productivity--and counterbalance the world’s aging population problem—has already begun. Additionally, as the aging population shifts from stocks to bonds for more stable income, they could play a role in lowering long-term bond yields. Lower bond yields are a catalyst for growth, good for bond prices, and thus good for bond returns.

The U.S. may also be able to capitalize on lower energy prices and its ability to be energy independent with its abundance of cheap natural gas. As energy prices rise in Europe, it becomes more economical to manufacture and transport gas within the U.S. to accommodate its large base of customers. With the world increasingly conscious about carbon emissions, manufacturing goods in North America could become more advantageous. Add to that the fact that carbon emissions are a global problem, and exporting pollution to other countries with lower emissions standards may eventually gain added scrutiny. We are already seeing the groundwork for another domestic manufacturing boom, with construction spending on manufacturing facilities in the U.S. more than doubling since the start of 2022.

Total Construction Spending on Manufacturing Facilities

Source: Cetera Investment Management, FactSet, U.S. Census Bureau. Data as of 9/30/2023.

Markets Forecast

Diversification may come back into favor in 2024. Large cap growth stocks have carried the market for much of 2023, but other stocks may shine if earnings growth follows the trajectory many anticipate next year. With bonds finally paying a real return (after adjusted for inflation), they could provide solid diversification for any equity volatility. Being an election year with a lot of geopolitical headwinds and a Fed possibly transitioning to a less restrictive monetary policy, there will likely be volatility along the way.

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