We are seeing numerous reports suggesting inflation is on its way back to 2%. We are not as confident about that as some appear to be. We believe that inflation around 3%, plus or minus a bit, is more realistic for 2024. Inflation forecast reports include lists of reasons why inflation should be headed back to 2% while leaving out any mention of striking labor, minimum wage increases, lingering tight labor supply, federal deficit spending, OPEC production cuts and sticky rent levels – all factors that could cause inflation to take longer to abate.

As of the time of this writing, bond and stock markets were up more than normal on hopes that interest rate hikes are over. One thing to note about interest rates is that the Federal Reserve sets short-term rates through their fed fund mechanism while the market sets rates on longer maturities. The market looks to price in variables like the stickiness of inflation, levels of debt issuance due to federal deficit spending, quantitative tightening in the form of Federal Reserve balance sheet reductions and chances for changes in economic conditions, to name a few. It seems a bit early to attach a reasonable level of confidence to many of these variables.

It stands to reason that housing would be noticeably affected by rising interest rates, and a quick look at the data shows that existing home sales are down. At the same time, new home sales are up. How is that possible? There is a suggestion that one of the forces keeping existing home sales down is that current home owners don’t want to lose their 3% mortgages and are not putting their houses up for sale.

The 2024 consensus is for equity markets to move higher, with many forecasting the S&P 500 to finish around 5,000, or about 10% higher than where it was at the time of this writing. We see these types of projections even more marginalized than usual if for no other reason than last year’s 18.5% return has been so lopsided. The seven largest stocks in the S&P 500 have driven the majority of the return, with the remaining 493 stocks being up only a couple of percent as of early December. Energy, consumer staples, healthcare and utilities have attractive valuations but don’t get much attention in the market.

We have mentioned in the past that fixed income bond yields represent some of the best value we have seen in the last 20 years. Bonds are starting to get investors’ attention, and more money is moving that direction. The challenge is balancing available yield with the proper spot along the maturity curve. Investors had been favoring short-term bonds offering the highest yield, but we see that shifting in an effort to spread out maturity roll rather than having so much concentrated in a narrow time frame.

Election years tend to avoid damaging recessions if for no other reason than because of the spending that occurs around election campaigns. While we don’t rule out a slowdown this year in the wake of higher interest rates and slowing consumer demand, our best estimate is for slow growth.

These outlooks are a collection of data points that come together with varying levels of influence, which is why nobody ever knows what the future will bring. It is important to remember that whatever happens, it is just one stepping stone along the way to long-term goals.