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2024 Investment Outlook

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Key takeaways

  • Investors are watching to see if the U.S. economy can maintain the resilient growth trajectory established last year.

  • Fourth quarter GDP was up 3.4% on an annualized basis in 2023, reflecting a modest upward adjustment from initial estimates of quarterly growth.

  • The Federal Reserve also adjusted upward its projection for 2024 economic growth.

The economy’s surprising resilience even when businesses and consumers were confronted with higher interest rates last year likely helped spur the stock market rally that continues in 2024’s opening months. According to the third estimate of fourth quarter 2023 Gross Domestic Product (GDP) issued in March 2024, the economy grew at an annualized rate of 3.4% during the period. That was a slight upgrade from previous estimates. For all of 2023, the economy grew by 2.5%, exceeding expectations and 2022’s 1.9% growth rate.1

“2023 was a year of mostly accelerating economic momentum instead of what many anticipated would be slowing growth,” says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management. “The primary reason for this is that consumer spending remains strong, which is driving the consistent growth we’ve seen.” Additionally, exports of goods along with federal, state and local government spending propelled fourth quarter growth.1

Chart depicts U.S. annualized quarterly gross domestic product, or GDP, which is a measure of total economic output from 2020 through 4Q 2023.
Source: U.S. Bureau of Economic Analysis, “Real Gross Domestic Product and Related Measures: Percent Change from Preceding Period,” March 28, 2024.

“The strong job market is helping consumers maintain spending levels,” notes Haworth. The economy continues to benefit from very low unemployment (3.9% in February) and solid job growth.2 In addition, there are significantly more job openings than there are available workers.3 In the fourth quarter, consumers increased spending for both goods and services. The holiday season proved to be a boon for retailers.

 

Staving off recession risks

In recent years, the U.S. economy faced increasing challenges, first triggered by the fallout from the COVID-19 pandemic in 2020, then a resurgence of inflation beginning in 2021 followed by a significant upturn in interest rates in 2022 and 2023. The primary measure of inflation, the Consumer Price Index (CPI), peaked in June 2022 at more than 9% over the previous 12-month period. Inflation has since slowed, and as of February 2024, stands at 3.2% over the previous 12-month period.2

“Recent data indicated that consumer spending has softened, but there are still a number of positive economic signals in other data,” says Rob Haworth, senior investment strategy director for U.S. Bank Wealth Management. “Nevertheless, a big question that may drive the markets and the timing of Fed rate cuts is whether consumers can continue spending at a sufficient pace to keep the economy growing.”

The easing of inflation appears to be directly related to the Federal Reserve’s (Fed) decision, beginning in 2022, to raise the primary interest rate it controls, the federal funds rate, for the first time since 2018. By July 2023, the Fed had hiked the target fed funds rate to a range of 5.25% - 5.50%, up from near zero percent before rate hikes began. It’s the highest level for the fed funds rate since early 2001.4 The Fed also ended its bond buying program and began reducing its bond holdings. The Fed’s aim was to slow economic growth as a way reduce inflationary pressures.

The Fed’s efforts to put the brakes on the economy increased the risk of recession. Yet consumers were not discouraged and spent sufficiently to keep the economy on track. 2023’s GDP grew comparably to pre-2020 growth, a period highlighted by low interest rates and inflation.

Chart depicts annual change to gross domestic product (GDP) for the U.S. economy 2000 - 2023.
Source: U.S. Bureau of Economic Analysis, February 2024.

The Fed signaled that rate hikes are likely finished for the current cycle and it may soon shift its focus to cutting short-term interest rates, a sign that it’s comfortable that inflation is not the threat it once was. However, Fed officials have indicated there is no rush to reverse its existing policy and begin cutting rates. “Market uncertainty today is tied in part to speculation as to when rate cuts will begin,” says Haworth.

 

Today’s higher interest rate environment

In response to the Fed’s aggressive interest rate hikes, yields on many fixed-income securities (certificates of deposit, money market funds, bonds) rose as well. Mortgage rates and interest charged on other types of financing, such as credit card debt, automobile loans and business loans, also moved higher.

The changing interest rate environment had its greatest impact on areas of the economy dependent upon lending, such as the housing market. Activity slowed due to increasing mortgage rates, which neared 8% in October 2023, the highest level in more than two decades (though mortgage rates have since declined from that peak).5 “One reason higher interest rates have yet to take a toll on the economy is that businesses and homeowners acted ahead of the rates hikes,” says Haworth. “Most homeowners obtained mortgages before rates changed. A number of businesses issued debt when rates were lower and have not yet needed to refinance that debt.”

 

Can the economy stay on track?

GDP reports throughout 2023 provided encouraging signs that the Fed may have achieved a “soft landing” for the economy, staving off a recession. The key question for investors looking ahead is whether the economy can maintain the momentum established in 2023.

“The Federal Reserve has upgraded its own expectations for 2024 GDP growth,” notes Haworth. At its March 2024 meeting, members of the policy-making Federal Open Market Committee updated its projection of 2024 GDP, raising it to 2.1% from 1.4%.6 “Recent data indicated that consumer spending has softened, but there are still a number of positive economic signals in other data,” says Haworth. “Nevertheless, a big question that may drive the markets and the timing of Fed rate cuts is whether consumers can continue spending at a sufficient pace to keep the economy growing.”

Haworth says investors should pay attention to jobs data, particularly as it relates to wage gains. Retail sales data may be another important measure to consider. “Retail activity could be a telling sign of whether the economy’s growth pace continues to beat expectations, or if we can look for it to slow,” according to Haworth.

Interest rate trends are another consideration, particularly as it relates to business capital investment. “If rates stay elevated or move higher and companies are forced to issue debt with more significant financing costs, that could dampen business activity and threaten current expectations for economic growth,” according to Haworth.

 

Implications for investors

The economy’s current growth trajectory may help boost corporate earnings, which would be a favorable development for stocks. At the same time, weaker economic data may hasten Fed rate cuts, though that may also elicit a positive reaction from equity markets, and likely be a positive for bond markets as well.

Notably, says Haworth, “GDP is not a primary economic indicator for professional investors. Other data points arrive on a timelier basis that signal the degree to which economic expectations are on track.” However, GDP is ultimately the measure that indicates the overall health of the U.S. economy, which has an impact on the markets.

Equity markets enjoyed a strong rebound in 2023 following 2022’s bear market, with the benchmark S&P 500 rising more than 26%. In 2024’s first quarter, the S&P 500 Index surpassed its previous all-time high, achieved two years prior.7 Much of the stock market’s strength in 2023 was limited to a narrow group of stocks, primarily in the technology sector. Haworth expects markets to remain “choppy” in the near term but adds if the economy manages to demonstrate ongoing strength in the coming months, that could work to the benefit of other sectors of the market that are more dependent on favorable economic trends. Nevertheless,

Consider reviewing your current portfolio with your wealth management professional to determine if it’s consistent with your long-term goals and positioned to meet the challenges of what continues to be a dynamic market and economic environment.

Note: Diversification and asset allocation do not guarantee returns or protect against losses. The Standard & Poor’s 500 Index (S&P 500) consists of 500 widely traded stocks that are considered to represent the performance of the U.S. stock market in general. The S&P 500 is an unmanaged index of stocks. It is not possible to invest directly in the index. Past performance is no guarantee of future results.

Frequently asked questions

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Disclosures
  1. U.S. Bureau of Economic Analysis, “Gross Domestic Product, Fourth Quarter 2023 (“Second” Estimate), Feb. 28, 2024.

  2. Source: U.S. Bureau of Labor Statistics.

  3. U.S. Bureau of Labor Statistics, “Jobs Openings and Labor Turnover Summary,” Mar. 6, 2024 and; “The Employment Situation Summary,” Mar. 8, 2024. Job openings stood at 8.9 million compared to 6.5 million unemployed workers seeking employment.

  4. Board of Governors of the Federal Reserve System, “Open Market Operations.”

  5. Freddie Mac, “Primary Mortgage Market Survey®” as of October 19, 2023.

  6. Board of Governors of the Federal Reserve, “Summary of Economic Projections,” March 20, 2024.

  7. S&P Dow Jones Indices.

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