At the start of 2023, a hot topic among the Wise People of Wall Street was not if, but when, the US economy would slide into recession. Some prognosticators were calling for another precipitous drop in stocks, too, after an 18% decline in 2022.
As often is the case, reality differed significantly from projections.
With the turn of the calendar to 2024, there’s a whole new narrative by the smart-set forecasters. Today’s commonly held views about the US economy and financial markets are:
- Jobs market will weaken
- Economy will stall but not fall into recession
- Inflation will continue to decline
- Federal Reserve will start bringing down interest rates
- Financial market returns will be about average: in the neighborhood of 8% for stocks and 4% for bonds
I think this is all quite reasonable. It’s helpful to begin a year by setting expectations, and the ones listed above are modest and fall well within the realm of possibility. But no one really knows what shape the economy, or the financial markets, will be in a year from today.
When writing to his clients during the financial crisis of 2008, Howard Marks, the Los Angeles-based money manager, shared his favorite quote from the esteemed economist John Kenneth Galbraith: “There are two kinds of forecasters: those who don’t know, and those who don’t know they don’t know.”
As a financial advisor, it’s good to keep this in mind. It’s also important to draw from past experiences and seek to understand what’s going on in the current environment, to provide the best possible guidance to clients on what is likely to happen in the long term.
Below, I’ve presented a table of returns related to Stocks, Bonds, and Cash, which are the main building blocks for many client portfolios.
The recent experience of returns from stocks and bonds differs from what you might expect to receive as an investor with a long time horizon.
(Source: Morningstar; Aswath Damodaran; *JP Morgan Asset Management)
You’ll also notice that projected returns for the Next 10 Years* (last column, blue font), from JP Morgan’s extensive Long Term Capital Markets Assumptions study, are moderate and more in line with the long-term historical experience (25 Years) than returns realized in more recent years.
While these statistics are informative, a picture can often provide additional clarity. The graph below presents another view of the long-term return experience for stocks, courtesy of Capital Group.
(Source: Capital Group; Stock index depicted is MSCI All Country World Index)
The picture catalogues many scary (and some tragic) events that have happened during the past thirty-five years, superimposed on the value of a standard global stock market index.
If you narrow your vision to a particular segment of the graph, you’ll see the stock index line swinging up and down, with many unfavorable outcomes in shorter periods corresponding to unfavorable events. Over the short-term, buying stocks seems to be a hit-or-miss activity.
But if you widen your vision to take in the whole graph, you’ll see episodes of volatility as part of a long-term, upward sloping, positive trend. If you decide to own stocks for the long-term, the odds of a positive result move decidedly in your favor.
There likely will be surprises in 2024, and we can imagine that some of the potential outcomes might translate to unfavorable results for your portfolio. It’s advisable to be prepared for downside scenarios.
But I also recommend that you ready yourself for a ho-hum year of pedestrian returns, as well as another year of terrific performance. By taking this approach, you’re mentally prepared for whatever unfolds in the year ahead.
Investors should focus on staying invested and diversified rather than reacting to surprises that come out of left field. Sticking to a financial plan that is designed around long-term goals, and a portfolio that supports the realization of those goals, remains the best way to achieve financial success.
RK