Despite a bumpy road for investors in 2023, there are a bounty of reasons to be optimistic leading up to the new year.
It’s been another year of market swirl, and still a 60/40 allocation of global stocks and bonds has generated a more than +10% return year-to-date. While we wouldn’t quite be saying that volatility is behind us as we head into December, this year has given us much to be thankful for. So with the holiday season getting into full swing, here are five things we (and markets) are grateful for this holiday season.
1. The U.S. recession that still hasn’t happened.
Coming into the year, investors feared that the U.S. economy would crack under the weight of all the Federal Reserve’s rate hikes. That didn’t happen, and growth (while on a cooling trend) is still decidedly on the “nice list”.
Gifts in 2023 have included: still-remaining consumer savings from pandemic-era stimulus; fiscal support from industrial policy bills such as the Inflation Reduction Act; a rapid private and public sector response to the regional banking crisis; a steady return of women to the labor force; limited housing stock, which kept home prices from tumbling; the fastest productivity growth since 2003 (outside a recession); and an unexpected progression of artificial intelligence that could still boost capital expenditures over the next decade if it mirrors past tech cycles (just see Nvidia’s earnings report from last week).
Taken together, this is good news for those on team “soft landing”.
This chart shows private investment in intellectual property as a percentage of U.S. GDP from 1975 to 1999. Starting in 1992 there is an upward arrow showing the trajectory of private investment growth until 1999. In 1975 the percentage contribution to real U.S. GDP from private investment in intellectual property was 0.01%. In 1976 the percentage contribution to real U.S. GDP from private investment in intellectual property was 0.18%. In 1977 the percentage contribution to real U.S. GDP from private investment in intellectual property was 0.11%. In 1978 the percentage contribution to real U.S. GDP from private investment in intellectual property was 0.12%. In 1979 the percentage contribution to real U.S. GDP from private investment in intellectual property was 0.2%. In 1980 the percentage contribution to real U.S. GDP from private investment in intellectual property was 0.09%. In 1981 the percentage contribution to real U.S. GDP from private investment in intellectual property was 0.21%. In 1982 the percentage contribution to real U.S. GDP from private investment in intellectual property was 0.12%. In 1983 the percentage contribution to real U.S. GDP from private investment in intellectual property was 0.17%. In 1984 the percentage contribution to real U.S. GDP from private investment in intellectual property was 0.3%. In 1985 the percentage contribution to real U.S. GDP from private investment in intellectual property was 0.21%. In 1986 the percentage contribution to real U.S. GDP from private investment in intellectual property was 0.17%. In 1987 the percentage contribution to real U.S. GDP from private investment in intellectual property was 0.1%. In 1988 the percentage contribution to real U.S. GDP from private investment in intellectual property was 0.18%. In 1989 the percentage contribution to real U.S. GDP from private investment in intellectual property was 0.29%. In 1990 the percentage contribution to real U.S. GDP from private investment in intellectual property was 0.22%. In 1991 the percentage contribution to real U.S. GDP from private investment in intellectual property was 0.18%. In 1992 the percentage contribution to real U.S. GDP from private investment in intellectual property was 0.17%. In 1993 the percentage contribution to real U.S. GDP from private investment in intellectual property was 0.12%. In 1994 the percentage contribution to real U.S. GDP from private investment in intellectual property was 0.11%. In 1995 the percentage contribution to real U.S. GDP from private investment in intellectual property was 0.2%. In 1996 the percentage contribution to real U.S. GDP from private investment in intellectual property was 0.33%. In 1997 the percentage contribution to real U.S. GDP from private investment in intellectual property was 0.41%. In 1998 the percentage contribution to real U.S. GDP from private investment in intellectual property was 0.37%. In 1999 the percentage contribution to real U.S. GDP from private investment in intellectual property was 0.45%.
The European and UK economies have felt the pinch of higher rates more meaningfully, with growth slowing at a faster pace. That process may continue into 2024, but at least so far, a solid labor market and consumer have acted as key supports against a more acute downturn.
2. A less-expensive holiday season.
One of the biggest surprises this year has been how much inflation has cooled alongside that economic resilience. While inflation isn’t back to the Fed’s 2% sweet spot, 40% of the Consumer Price Index’s components are now at or below that coveted level in the U.S. Things are moving in a similar direction this side of the pond, too.
You may feel it in your holiday feast this year, too. Out-of-town guests are looking at lower prices for car rentals, airfares and gasoline prices; yet you’re still looking at a steeper bill when you pick up the turkey and pies.
This is a bar chart of the year over year percent change in the price of common goods related to thanksgiving dinner and travel. The components are represented by the following U.S. Consumer Price Index subcategories: "Airfares" by airline fares, "car rentals" by car & truck rentals, "gasoline" by gasoline, "potatoes" by potatoes, "pie" by frozen & refrigerated bakery products, "cranberries" by canned fruits, "turkey" by uncooked poultry, and "gravy" by sauces & gravies. The year-over-year calculation is as of October 2023 compared to the prior period ending October 2022. Gravy or the subcategory for sauces and gravies within the U.S. Consumer Price Index is up 8% from the prior year. Turkey or the subcategory for uncooked poultry within the U.S. Consumer Price Index is up 7% from the prior year. Cranberries or the subcategory for canned fruits within the U.S. Consumer Price Index is up 3% from the prior year. Pie or the subcategory for frozen & refrigerated bakery products within the U.S. Consumer Price Index is up 3% from the prior year. Potatoes which is its own subcategory within the U.S. Consumer Price Index is down -3% from the prior year. Gasoline which is its own subcategory within the U.S. Consumer Price Index is down -5% from the prior year. Car rentals or the subcategory for car and truck rentals within the U.S. Consumer Price Index is down -10% from the prior year. Airlines or the subcategory for airline fares within the U.S. Consumer Price Index is down -13% from the prior year.
The last mile of progress may still take some time, but the stickiest drivers of inflation—namely the still-hot clip of wage growth and rent prices—have ample room to continue cooling. This gives us the confidence that central banks are probably finished hiking and seem to be in their “higher for longer” era.
3. An end to rate hikes.
Since the three major developed market central banks (the Fed, ECB and BoE) started hiking to tame inflation, they’ve increased policy rates a cumulative 1,490 basis points. With all three now seemingly on hold, the prevailing debate is shifting to when the first rate cuts might come. Markets are currently pricing in a 60% chance of a Fed cut by its May meeting.
To be sure, the impacts of the rate hikes we’ve already seen will continue to work their way through the economy (which is what the Fed wants to see), but it’s also worth noting that sectors that were the first hit by hikes are in a more festive mood and starting to stabilize. Manufacturing activity is showing signs of improving, and home buyers could get some relief from moderating mortgage rates. According to the Mortgage Bankers Association, the average 30-year fixed mortgage rate in the U.S. has fallen almost -50 basis points from its highs less than a month ago, to 7.41% (as of November 17).
4. All the tools are back in the investing toolkit.
There has been no shortage of market volatility in 2023. But this has also opened up pockets of opportunity and given long-term, multi-asset investors what we think is a solid entry point (and the luxury of choice).
Today, historically high bond yields offer an opportunity to lock in higher income potential for longer, especially in high-quality corporate bonds. But with central banks at the end of their hiking cycles, and growth and inflation on a slowing trend, the still-elevated yields we see today may not last much longer.
For those looking to put more risk on the table, stocks look compelling. Following a period of reckoning in corporate earnings, U.S. stocks, especially the big tech names (as AI stands to generate real revenue growth), look poised to continue their rally in the year ahead.
Coupling this near-term opportunity with J.P. Morgan Asset Management’s 2024 Long-Term Capital Market Assumptions (which scrutinize over 200 asset and strategy classes to provide return outlooks over a 10- to-15-year investment horizon), today appears to offer a strong starting point for investors. Every major asset class stands to outperform cash over that time period.
This chart shows the J.P. Morgan Asset Management Long Term Capital Market Assumptions across the categories of cash, fixed income, equity, and alternatives in U.S. dollar terms. U.S. Cash is 2.9%, U.S. Inflation is 2.5%, U.S. High Yield Bonds are 6.5%, U.S. Investment Grade Bonds are 5.8%, U.S. Aggregate Bonds are 5.1%, Global Government Bonds are 4.8%, Emerging Markets Equity is 8.8%, Global Equity is 7.8%, U.S. Large Cap Equity is 7.0%, Private Equity is 9.7%, U.S. Core Real Estate is 7.5%, and Diversified Hedge Funds are 5.0%.
5. The opportunity to help you achieve your financial goals.
Above all, we’re thankful for the trust you place in all of us at J.P. Morgan, and for following markets along with us throughout the year.
This year has underscored the value of having a well-thought-out financial plan—and sticking to it. Why are you investing in the first place? Is it to get your money to grow for eternity, over multiple generations? Is it to pay for your child’s future education costs? Or is it simply to protect your money from losing value? With a goals-based approach to investing, we’re focused on helping our clients invest through cycles and challenges, in both good times and bad.
Here’s to another year of sharing our Top Market Takeaways. As we enter the final month of the year, we wish a happy holiday season to you and yours.
All market and economic data as of November 2023 and sourced from Bloomberg Finance L.P. and FactSet unless otherwise stated.
We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. Opinions, estimates, and investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice.
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