We were too pessimistic on economic growth, but hit the mark when we spotted potential for stronger markets.
’Tis the season. No, not for trees, ornaments, dreidels and Santa Claus, but for Wall Street outlooks. Most that we have seen are lukewarm on global markets and the economy. To summarize them: Inflation is coming down and central banks should be able to start lowering interest rates, but growth won’t be great. Stocks could have a decent year, while bonds seem like a reasonable place to be. Many risks, from regional bank balance sheets to elections, to geopolitics, will simmer. Ho-hum.
We will release our Outlook for 2024 on Monday, and we are excited to share our views with you. (Sneak peek: We are a little bit more excited about the year to come, and especially about the newfound choices that investors have.) But before we fully turn our attention to the future, we wanted to spend this week taking a look back.
One year ago, we released our 2023 Outlook, titled See the Potential. Weaker Growth, Stronger Markets. So what did we get right, and what did we get wrong?
Let’s start with what we missed this year.
The big thing that we missed from our 2023 Outlook was that economic growth would weaken, even to recessionary levels.
In fact, we believed a U.S. recession was more likely than not. We were too pessimistic. Yesterday, the final release of the third-quarter GDP report showed the U.S. economy grew at a 5.2% annualized pace, the best mark since the fourth quarter of 2021. The U.S. consumer, who has been doubted for the better part of the last 18 months, drove half of the quarterly increase in GDP. U.S. companies have hired about 2.5 million workers this year, and the unemployment rate is still hovering near 50-year lows. In nominal terms (i.e., including inflation), the economy has grown by 25% since the pre-COVID peak.
The U.S. economy was resilient in 2023
This graph shows the U.S. economy was resilient in 2023 by the nominal U.S. gross domestic product, trillions of dollars. In 1Q 2018, nominal U.S. GDP was $20,328.6 billion. In 2Q 2018, nominal U.S. GDP was $20,580.9 billion. In 3Q 2018, nominal U.S. GDP was $20,798.7 billion. In 4Q 2018, nominal U.S. GDP was $20,917.9 billion. In 1Q 2019, nominal U.S. GDP was $21,104.1 billion. In 2Q 2019, nominal U.S. GDP was $21,384.8 billion. In 3Q 2019, nominal U.S. GDP was $21,694.3 billion. In 4Q 2019, nominal U.S. GDP was $21,902.4 billion. In 1Q 2020, nominal U.S. GDP was $21,706.5 billion. In 2Q 2020, nominal U.S. GDP was $19,913.1 billion. In 3Q 2020, nominal U.S. GDP was $21,647.6 billion. In 4Q 2020, nominal U.S. GDP was $22,024.5 billion. In 1Q 2021, nominal U.S. GDP was $22,600.2 billion. In 2Q 2021, nominal U.S. GDP was $23,292.4 billion. In 3Q 2021, nominal U.S. GDP was $23,829 billion. In 4Q 2021, nominal U.S. GDP was $24,654.6 billion. In 1Q 2022, nominal U.S. GDP was $25,029.1 billion. In 2Q 2022, nominal U.S. GDP was $25,544.3 billion. In 3Q 2022, nominal U.S. GDP was $25,994.6 billion. In 4Q 2022, nominal U.S. GDP was $26,408.4 billion. In 1Q 2023, nominal U.S. GDP was $26,813.6 billion. In 2Q 2023, nominal U.S. GDP was $27,063 billion. In 3Q 2023, nominal U.S. GDP was $27,644.5 billion.
Another big surprise is that the rise in mortgage rates did not lead to price declines for U.S. homes. In fact, new home sales have stabilized at levels that are consistent with the pre-pandemic environment, and the lowest inventory of existing homes for sale on record has driven prices back to all-time highs. Construction firms have continued to hire workers, both for residential housing construction and for projects related to industrial policy provisions, such as traditional infrastructure and semiconductor manufacturing facilities. The sectors that are most sensitive to interest rates have been bent, but not broken.
We were even more negative on Europe one year ago. To be fair, things looked very bleak. The continent was heading into its first winter without access to Russian natural gas, and inflation was soaring. However, warm winter weather and a resilient services sector helped the European economy avoid the worst, and the euro is back to around $1.10 per dollar after breaking below parity last fall.
One place where we were right to be cautious on growth was China. Despite a surprising exit from “Zero-COVID,” growth generally sputtered all year, given the slow-motion deleveraging taking place in the property sector.
When it comes to markets, the growth resilience translated to even higher interest rates. The Federal Reserve raised interest rates to 5.5% this year, and at their peaks, interest rates across the U.S. Treasury curve were close to 5%. That challenged fixed income performance this year (we expected rates to fall), but the entry yields investors earned along the way helped mitigate the price declines in bonds.
Stronger growth pushed yields higher throughout the year
The chart shows 2- and 10-year U.S. Treasury yields since December 2022. On December 1, 2022, the 10-year Treasury yield was 3.50% and the 2-year Treasury yield was 4.23%. On January 2, 2023, the 10-year Treasury yield was 3.87% and the 2-year Treasury yield was 4.43%. On February 1, 2023, the 10-year Treasury yield was 3.42% and the 2-year Treasury yield was 4.11%. On March 1, 2023, the 10-year Treasury yield was 3.99% and the 2-year Treasury yield was 4.88%. On April 3, 2023, the 10-year Treasury yield was 3.41% and the 2-year Treasury yield was 3.96%. On May 1, 2023, the 10-year Treasury yield was 3.57% and the 2-year Treasury yield was 4.14%. On June 1, 2023, the 10-year Treasury yield was 3.60% and the 2-year Treasury yield was 4.34%. On July 3, 2023, the 10-year Treasury yield was 3.85% and the 2-year Treasury yield was 4.94%. On August 1, 2023, the 10-year Treasury yield was 4.02% and the 2-year Treasury yield was 4.90%. On September 1, 2023, the 10-year Treasury yield was 4.18% and the 2-year Treasury yield was 4.88%. On October 3, 2023, the 10-year Treasury yield was 4.80% and the 2-year Treasury yield was 5.15%. On November 1, 2023, the 10-year Treasury yield was 4.73% and the 2-year Treasury yield was 4.94%. On November 30, 2023, the 10-year Treasury yield was 4.33% and the 2-year Treasury yield was 4.70%.
So where were we right?
We urged investors to see the potential for stronger markets in 2023, and that view has been validated.
The total return for the S&P 500 is nearly 20% year-to-date, and a global 60/40 portfolio has returned over 10%. For what it’s worth, rolling Treasury bills have returned 4.6%. The simplest explanation for the strong performance from markets is that inflation came down (as we expected), but growth did not. One year ago, developed world inflation was between 7% and 7.5%. It has dropped to between 3% and 3.5% today. Spot energy prices have dropped 30% from year-ago levels, and other problematic areas such as used cars are likewise seeing outright declines. The risk of a wage-price spiral (which we never thought was particularly high) has receded even further.
Risk assets outperformed rolling Treasury Bills in 2023
This graph shows risk assets outperformed rolling Treasury bills in 2023. At the end of January, the S&P 500 cumulative total return was 6.28%, the 60/40 allocation cumulative total return was 5.59%, and the T-Bill cumulative total return was 0.34%. At the end of February, the S&P 500 cumulative total return was 3.68%, the 60/40 allocation cumulative total return was 2.70%, and the T-Bill cumulative total return was 0.69%. At the end of March, the S&P 500 cumulative total return was 7.48%, the 60/40 allocation cumulative total return was 5.90%, and the T-Bill cumulative total return was 1.09%. At the end of April, the S&P 500 cumulative total return was 9.16%, the 60/40 allocation cumulative total return was 7.20%, and the T-Bill cumulative total return was 1.48%. At the end of May, the S&P 500 cumulative total return was 9.64%, the 60/40 allocation cumulative total return was 5.81%, and the T-Bill cumulative total return was 1.89%. At the end of June, the S&P 500 cumulative total return was 16.88%, the 60/40 allocation cumulative total return was 9.70%, and the T-Bill cumulative total return was 2.33%. At the end of July, the S&P 500 cumulative total return was 20.64%, the 60/40 allocation cumulative total return was 12.21%, and the T-Bill cumulative total return was 2.78%. At the end of August, the S&P 500 cumulative total return was 18.72%, the 60/40 allocation cumulative total return was 10.00%, and the T-Bill cumulative total return was 3.24%. At the end of September, the S&P 500 cumulative total return was 13.06%, the 60/40 allocation cumulative total return was 5.90%, and the T-Bill cumulative total return was 3.70%. At the end of October, the S&P 500 cumulative total return was 10.68%, the 60/40 allocation cumulative total return was 3.58%, and the T-Bill cumulative total return was 4.18%. At the end of November, the S&P 500 cumulative total return was 20.29%, the 60/40 allocation cumulative total return was 11.46%, and the T-Bill cumulative total return was 4.63%.
Last year, we rightly argued that there was a substantial degree of risk already embedded in equity market valuations. What we missed is that the biggest bounceback was coming from the mega-cap tech companies that were actually in the final stages of their own recession one year ago. Indeed, the mega-cap-heavy NASDAQ 100 Index has outperformed its small- and mid-cap counterparts by over 40 percentage points, in large part due to impactful cost-cutting measures and the newfound growth potential of artificial intelligence. We won’t complain too much, though. Staying fully invested in equities ensures that you don’t miss unexpected market rallies.
Further, we thought several opportunities would present themselves that would best be expressed through private investments. While the full performance of these types of funds won’t be known for several years, secondary private equity and stressed real estate have both had promising starts.
Putting it all together: Use this outlook season wisely
Outlook season is one of the most wonderful times of the year (for us at least), but it’s important to keep things in context. We think investment outlooks are important because they give investors a chance to reflect on the current environment and define their expectations for how they see the future evolving. We aren’t trying to “predict” the future, but we are assessing the likelihood that assets can deliver on what we expect them to do for investment portfolios. Along the way, we are constantly incorporating data, news, events, observations and analysis to determine if we need to make any changes. Outlooks are just an important checkpoint on a longer journey.
This outlook season, we encourage you to spend some time reflecting on what you want your wealth to do for you, and if your investments are aligned with that intent. We are excited for you to read our Outlook next week, and to spend time talking through what it means for you with your advisor.
All market and economic data as of December 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.
RISK CONSIDERATIONS
- Past performance is not indicative of future results. You may not invest directly in an index.
- The prices and rates of return are indicative, as they may vary over time based on market conditions.
- Additional risk considerations exist for all strategies.
- The information provided herein is not intended as a recommendation of or an offer or solicitation to purchase or sell any investment product or service.
- Opinions expressed herein may differ from the opinions expressed by other areas of J.P. Morgan. This material should not be regarded as investment research or a J.P. Morgan investment research report.
