Stock markets were expected to suffer as the combination of weak demand and soaring interest rates squeezed profit margins and corporate profits.
Instead, the US economy defied the pessimists: Real GDP growth rose a respectable 2.6 percent in 2023, while the unemployment rate fell to a near 50-year low.
Artificial intelligence hype led to stunning gains for major US technology stocks, while a crash in the US bond market pushed the yield on the benchmark US 10-year note to 5 percent for the first time in 16 years (yields are rising). when bond prices fall).
Given the inability of experts to predict what will happen next year, it's hardly surprising that investors are cautious about their forecasts for this year.
Those who followed the experts' advice felt firsthand how costly it can be to stray too far from their benchmarks when allocating assets. Still, experts have a much better track record at picking market trends than most punters. Therefore, smart investors have concluded that the best course of action is to be aware of the consensus opinion but not have complete confidence in its predictions.
And as of this writing, market experts agree that 2024 will see a rare soft landing for the U.S. economy as higher interest rates dampen economic activity and push inflation down without significantly increasing the unemployment rate. This will allow the Federal Reserve to significantly cut interest rates, setting the stage for a continuation of the rally in the US stock market.
The risk, of course, is that the Fed will be reluctant to cut interest rates.
Currently, futures markets are pricing in six rate cuts this year – the first to come at the Fed's March meeting – which would keep official U.S. rates at 3.75 percent to 4 percent through December. In other words, investors are much more optimistic about rate cuts than Fed officials, who have planned three rate cuts this year to 5.5 percent, from the current 5.25 percent.
Investors' confidence that the Fed will cut rates quickly is based on the sharp decline in U.S. inflation at a time when U.S. economic activity is slowing.
The problem is that the sharp decline in U.S. inflation is largely due to the easing of supply constraints during the pandemic as well as falling energy prices. Meanwhile, the latest U.S. jobs data shows the country's labor market defying expectations of a slowdown.
The U.S. economy added a better-than-expected 216,000 jobs in December and the unemployment rate remained steady at 3.7 percent.
But wage growth is accelerating. The average hourly wage rose by 0.4 percent in December, meaning wages rose by 4.1 percent compared to the previous year. Given that U.S. consumer prices rose 3.1 percent year-on-year in November, this suggests that real – or inflation-adjusted – profits are now rising sharply after falling sharply in 2022.
Factory workers benefited from particularly high wage increases. Wages for manufacturing workers rose 0.9 percent in December after rising 0.8 percent in November. These are the largest wage increases in the manufacturing sector in four decades.
This largely reflects the record wage agreements that the United Auto Workers reached with the three Detroit automakers – General Motors, Ford and Stellantis – after a six-week strike. As a result, auto companies with manufacturing facilities in the U.S., such as Toyota, Honda and Tesla, have increased wages for their non-union workers by 10 percent or more.
Given that many of these wage increases will not take effect until this month, this suggests that strong wage increases in the manufacturing sector will continue.
Fed officials are aware that the sharp decline in inflation has been largely confined to the goods sector. And they will fear that the sharp rise in manufacturing wages – along with continued pressure on housing costs and services inflation – could cause U.S. inflation to settle at levels that are above The target is 2 percent.
This means that experts' forecasts of favorable market conditions in 2024 could be in tatters if the Fed decides to stay on hold for longer than markets expect.
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