This article was originally published in The Telegraph.
A year ago, in the week before Christmas, I rounded out 2022 with some predictions for 2023. In the interests of transparency, I’m devoting my last column of this year to revisiting my forecasts. Glutton for punishment, I’ll then make some new ones for the year ahead.
Last December we were licking our wounds after a brutal year. The S&P 500 had fallen by 25% between January and October and bonds had followed suit as interest rates rose further and faster than expected. My first prediction was that we might retest the October low for shares but that the market would not fall much further. I thought we would end 2023 a bit higher than we started.
I was right about the low being in, but too cautious about the rebound. That is often the case. It is human nature to overweight the recent past when making forecasts. It is hard to be optimistic after a big market correction, but it is one of the key characteristics of successful investors.
Next, I predicted a rapid fall in inflation to 3% on both sides of the Atlantic. That was spot on for the US and, as we learned this week, only a little optimistic about the stickier inflation over here. I expected the Fed to edge interest rates higher to 5.25% and then pause, contrary to market expectations of a rapid retreat. I was right about the Fed erring on the side of caution.
I was wrong about the consequences, though. I thought higher-for-longer rates would push the US into recession in 2023 and that would force the Fed into retreat. I expected interest rates to be falling by now, to 4.5% in the US and 4% in the UK. I predicted the 10-year Treasury yield would end the year at 3.6%. In fact, it is a fraction below 4%. What I did not expect was the detour to 5% along the way, which delivered another year of poor bond returns but created a great buying opportunity.
As for the stock market, I got one thing wrong and one right. I expected a bigger fall in profits than materialised. Predicting a mild recession, I thought earnings would be 10% lower in 2023. Actually, they fell by less than 5%. What I foresaw, but underestimated, was investors’ willingness to look through the downturn. I expected the US market’s price-to-earnings ratio to edge higher from 17 to 18. In fact, it has leaped ahead to 21. The combination of the two means that the S&P 500 is not 3,600, as I feared, but more than a thousand points higher and back at its January 2022 peak.
I was better on the FTSE 100. On account of its low starting valuation, I thought it would do better than the US and end the year at 7,800. With the Santa Rally underway in the wake of last week’s dovish comments from Fed chair Jerome Powell and this week’s better than expected UK CPI number, that won’t turn out to be such a bad call.
I didn’t reference China a year ago, which was just as well. Like most observers, I assumed its belated Covid re-opening would be a positive. It was not and China has been the worst performing of the world’s major markets as consumer spending failed to bounce back and the government initially resisted further stimulus. I read Japan better, expecting ongoing reforms to change the narrative, which they did, making it one of the best-performing markets of the year.
So, what do I expect to see in 2024? In some ways, I predict the 2023 playbook to be delivered a year late. The lags between changes in interest rates and their impact on the economy are variable. Recession didn’t arrive this year, but it could in 2024. With luck, any downturn will be shallow. Our economies are less susceptible to monetary policy than they were.
So, central banks will hold off on cutting rates as long as they feel able, but they will then be forced to do so more aggressively than they thought. I expect interest rates on both sides of the Atlantic to be less than 4.5% this time next year and 10-year Treasury and Gilt yields to be lower still at under 3.5%. Inflation will be near the 2% target.
Now is a good time to lock in higher bond yields. The maximum opportunity may have already passed but it’s not too late for bond investors. Cash should continue to offer a decent risk-free income for at least the first half of the year. History cautions against tying up too much of your patient money in cash, but it looks attractive for the time being.
As for shares, last year’s cautious optimism looks about right, 12 months on. Shares are neither cheap nor expensive. Earnings forecasts are a bit too high but falling interest rates will support valuations. The long run of US outperformance will fade, so a global approach makes sense – it naturally weights your portfolio to the US but allows for better relative performance elsewhere.
It’s finger in the air stuff, but I pencil in 5,200 for the S&P 500 and 8,200 for the FTSE 100. Income investing should work well as pay-out ratios remain low and cash will become a less attractive alternative as the year progresses. A defensive, income-focused approach makes the UK look relatively appealing. Chinese stimulus will help both China’s domestic market and European exporters too. In a year of political uncertainty, with a string of unpredictable elections, gold will be seen as a safe haven and stay above $2,000 an ounce. Slowing demand will keep the oil price below $90. Sterling will flat line as rates fall on both sides of the Atlantic.
Anyway, I offer these predictions with the humility of experience. As with last year’s forecasts, some will be better than others.
