The Outlook for 2024
My outlook for 2024 is based on the two most important drivers of the economy and the stock market: Government stimulus and interest rates.
Government Stimulus
My outlook for government stimulus is simple and hard to refute: We will see a lot of borrowing. Probably more than last year, which was $2 trillion, and quite possibly $2.3 trillion or more this year.
This level of government borrowing will keep the economy going just fine. It’s almost 10% of our GDP! It’s some of the most massive government stimulus we have seen in our history outside of the peak year of Covid. And, unlike during Covid, the economy is wide open.
Interest Rates
My outlook for the 10-year interest rate: It will stay below 5% except for potentially brief periods above 5%. Although there is great optimism the Fed will make big decreases in interest rates, I am more skeptical.
I think the Fed will remain concerned about inflation more than many investors expect, despite the good readings we have been getting on inflation lately. I also think the Fed will be forced to print more money to help fund the deficit and keep interest rates from going higher. I don’t think they will want to print a lot more money to lower the 10-year rate back to 2-3% levels.
That said, we are at 4.1% now and it’s certainly possible we could go to 3.5% by summer. I’m not counting on it, but it’s quite possible.
Interest rates below 5% will keep the stock market going just fine. Expect pullbacks when rates rise, but as long as they stop going up, the market will keep going up.
Areas of Concern
Honestly, we could just wrap up the 2024 outlook with that alone. Those two factors probably account for 80% or more of what will happen this year. However, if we want to dive into the other 20%, we can take a closer look.
For areas of concern, there is no question that commercial real estate prices and construction are top on the list. While the stock market can easily handle 4% interest rates, the commercial office market cannot. Non-residential construction fell 14% last year, according to Dodge Construction. I expect it to fall more this year. The American Institute of Architects Billings Index, which is a good forecaster of future commercial construction, has been very negative for the last four months.
In Washington DC, considered the safest office market in the country for many years, sales activity has fallen more than 90% since 2017. And prices have fallen around 60% for the few office buildings that sell. I would expect prices to stay low, especially as demand for space likely continues to stay low.
Residential real estate prices and new construction are also of concern. Like commercial real estate, mortgage rates of 5-6% are too high to maintain current prices. Sellers will try desperately not to sell, which will keep prices from falling much this year, but they will very likely start falling, as they already have in some cities. Also, the lack of home sales is hurting all sorts of people in real estate, moving and home furnishings. Residential construction is down 12% this year according to Dodge Construction and I suspect it will continue to fall next year.
I don’t expect that any downturn in commercial real estate this year will cause a major banking crisis. Banking is sure to be hit at some point, but if a future banking crisis is significant enough, the Fed will move to minimize the damage.
In a normal economy, a downturn in commercial and residential real estate would hurt. But massive Congressional government economic stimulus will easily overcome any foreseeable problems.
The Presidential Election
Although Presidential elections are important, I don’t think it will have much impact on the stock market or the economy. Deficits and interest rates are just so dominant in their impact on the market and the economy that they make other factors much less important.
To the extent there is any impact, I suspect that the market will react more favorably toward a Trump victory and then a Biden victory. As far as the Presidential impact on deficits, I think we will be running big deficits no matter who wins. Trump will certainly support making his tax cuts permanent when they expire in 2025. That alone keeps $350 billion in deficit spending going.
As for interest rates, I think the Fed will be much more driven by the need to finance deficits than anything else. And the Fed is dependent upon the bond market to help it finance deficits, not the President. To the extent that the President has an impact, Trump has shown more willingness to criticize the Fed for raising rates than Biden. And, since he will be appointing the next Fed chairman, that would have some added impact.
Geopolitical Problems
Although I don’t know exactly the course that geopolitical problems in Israel, Ukraine and China will take this year, what I can say, based on history, is that they won’t have any long-term impact on the stock market. Since 2000 we have seen a massive terrorist attack on the US. We’ve been involved in two large wars, Iraq and Afghanistan. We have seen big wars in Syria and Ukraine, among others. And yet none of it had a long-term impact on the stock market. I don’t expect the geopolitical events this year to be any different in their market impact.
The Outlook for Bond and Real Estate Investments
The damage to bonds from higher rates will be minimized by bond animals looking to invest in the dip. However, the upward pressure on rates from massive Congressional borrowing will beat up the bond bulls at some point. If not this year, then next year.
Animal spirits don’t seem to be as strong in the real estate markets. Hence, REITs and other types of real estate investments will likely suffer more than bonds. Long term, office buildings will continue to be battered by refinancing at high rates and lack of demand. Multi-family investments will also be hit by refinancing pressures, but not nearly as bad as office buildings, who are also losing customers.
Changes in real estate will happen slowly, but unlike the past, when real estate could quickly rebound, it won’t this time. In a very real sense, commercial real estate will give us an early look into the future Aftershock. I will address this further in a separate article.
The Beginning of the Aftershock
It’s worth pointing out that in its simplest form the Aftershock is simply a function of rising interest rates. As interest rates rise, the Aftershock occurs. For now, as we have risen from 1.5% to 4% you will see the early Aftershock in its effects on bonds and real estate. When rates rise further, you will see the effect become more powerful on bonds and real estate and eventually they will start to affect stocks.
It’s a fascinating evolution. We will be spending much more time discussing this over the coming months.
Looking forward to it all this year: The Good, the Bad and the Ugly. We live in a most interesting time where opportunities abound, but dangers lurk ahead.
Happy New Year!
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