Investment Comment
5th January 2024
Happy New Year but don’t expect a forecast
"It's hard to make predictions, especially about the future." - Yogi Berra
2023 saw surprisingly robust returns from many equity markets. The 4th quarter of 2023 was a buoyant period for investors as both equities and bonds rose in unison. With inflation continuing to fall, Central Banks indicated that they are not likely to raise interest rates further in 2024. Markets took that as a sign that interest rates would be cut in 2024 and bond yields fell, and despite the poor economic backdrop in Europe and a slowing environment in the US, equities rallied across the board.
It is striking to see that economists’ inflation forecasts haven’t evolved much over the past 12 months, despite the policy tightening and the amount of ink spilt over inflation. After climbing in 2022, the average expectation for inflation in 2023 didn’t shift markedly through the past twelve months. Likewise forecasts for 2024 inflation appear quite stable (albeit the UK seems to err on the side of having higher inflation than either the US or the Eurozone). The stability in the inflation outlook is striking given that a key driver in the equity market has been the interest rate cycle. Certainly, since October 2023, when the US Federal Reserve gave a clearer indication that they were close (or at) the top of the interest rate cycle, both bond and equity markets appear to be pricing in a series of interest rate reductions in 2024.
Inflation forecasts for 2023
Source: Artorius, Bloomberg
Inflation forecasts for 2024
Source: Artorius, Bloomberg
Compared to the stability of the inflation forecasts, economists appear to have been surprised by the resilience of economic growth in 2023, which in the US is expected to have been in excess of 2%, compared to less than 0.5% predicted for the year in January. Likewise the UK’s growth outcome was expected to be close to a -1% fall in activity. However, economists now expect the UK to have grown by 0.5% for 2023 as a whole.
Economic growth forecasts for 2023
Source: Artorius, Bloomberg
Economic growth forecasts for 2024
Source: Artorius, Bloomberg
For 2024, expectations are that the UK and Eurozone will continue to experience lacklustre economic growth of around 0.5%, whilst the US economy is forecast to grow by close to 1.5%. We would suggest that the unexpected economic resilience in the US is partly due to the willingness of the US government to deploy large fiscal stimulus in 2023.
The revision higher of US economic growth expectations, both in absolute terms and relative to both the UK and Eurozone, does make us query the 5% fall in the US Dollar against both Sterling and the Euro through 2023.
The equity market isn’t the economy
Whilst economists get a poor press for their inability to predict the future, the investment strategists that have to predict the outcome for equity markets tend to fare less well. Going into 2023 the average prediction was 4,031 for the year end close for the S&P 500, the US equity benchmark, according to the MarketWatch article from the end of 2022: Wall Street expects S&P 500 to finish 2023 at 4,000 after missing mark by the widest margin since 2008 - MarketWatch. The S&P started the year at 3,830, suggesting that markets were expected to return 5.2% for 2023. The resultant 26.3% return of US equities does appear to have been much higher than most strategists were predicting in 2023.
This follows the prediction of US equity returns in 2022 of 3%, and the resultant drop in US equities of 18%. As of the end of 2023, US equity strategists predict that the market will climb to 4,833 from the end of 2023 level of 4,769, a return of 1%. Whilst we shy away from making point predictions, given that our own chequered history in making them means that we recognise them as unhelpful, we suggest that the US equity market is unlikely to be at current levels in 12 months time.
The Shipping Forecast
The above example of investment strategists suggest that weather forecasters shouldn’t be so maligned. This week saw the 100-year anniversary of the Shipping Forecast being broadcast. The history of the forecast goes back to 1861, when Vice-Admiral Robert FitzRoy developed a telegraphic messaging system to issue weather warnings to ships, following the loss of the steam clipper Royal Charter. The vessel founded (sank) in a violent storm off the coast of Anglesey, with the loss of more than 450 lives. He was the main influence in the early development of the Met Office, which was then primarily intended to improve safety at sea. Interestingly, Fitzroy is the only shipping area named after a person, and that was only because the name of the area covered by Fitzroy was called Finisterre until 2002, when it was changed so not to be confused with the Spanish version of the Shipping Forecast who also had an area called Finisterre. As an aside, Fitzroy captained HMS Beagle, which took Darwin on his trip that inspired the writing of On The Origin of Species.
Happy birthday to one of the most relaxing things on the radio (and indeed in life), and may the year be moderate to good for you all.
100 years of broadcasting the Shipping Forecast
Source: MetOffice.gov.uk
All expressions of opinion reflect the judgment of Artorius at 5th January 2024 and are subject to change, without notice. Information has been obtained from sources considered reliable, but we do not guarantee that the foregoing report is accurate or complete; we do not accept any liability for any errors or omissions, nor for any actions taken based on its content. The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested. Past performance is not a reliable indicator of future results. Nothing in this document is intended to be, or should be construed as, regulated advice. Artorius provides this document in good faith and for information purposes only. Reliance should not be placed on the information contained within this document when taking individual investments or strategic decisions. Artorius Wealth Management Limited is authorised and regulated by the Financial Conduct Authority. Artorius is a trading name of Artorius Wealth Management Limited.
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