The market outsmarted 2 major themes in 2023. Now what?

December 2023
 

Warnings of a US recession on the horizon and anticipated interest rate cuts made headlines during much of 2023: however neither panned out. Eric Hundahl, BNY Mellon Investment Management Head of Portfolio Strategy, reflects on themes that have started to turn course and what these changes could mean for 2024.

Highlights

• The US economy remains strong despite the Federal Reserve’s (the Fed) aggressive rate tightening 
• Consumer spending and sentiment has rebounded from earlier in the year 
• It’s unlikely the Fed will start cutting rates until mid-2024

Going into 2023, there were several major themes the market miscalculated says Eric Hundahl, BNY Mellon Investment Management Head of Portfolio Strategy. The first being that we’d enter into a global recession. “Although some countries are in recession or went into recession, the economic data in the US really surprised us to the upside,” says Hundahl. “The economy is really showing signs of resiliency and strength, largely driven by a strong consumer that we thought would break this year.”

Consumers keep spending

Consumer spending, both for services and goods, edged upward during the third quarter of the year despite a slowing in real disposable income, notes Hundahl. Furthermore, consumer sentiment has also reversed course from peak pessimism at the end of 2022. Aggregate household balance sheets remain strong as well, with household net-worth-to disposable income near all-time highs, says Hundahl.

As the likelihood of a recession in the US is placed on the back burner given the resiliency of the economy, next year could bring a better balance between economic growth and inflation as policy works to slow inflation back to target while growth remains positive.

Higher interest rates for longer

In February, the Fed attempted to fight inflation by raising interest rates .25 points – a move repeated in March and May. “The market expected that the Fed would actually be cutting rates by now,” says Hundahl. “Now the markets are expecting that the Fed doesn't start to cut until the middle of next year.”

“Chairman Powell would like to keep the window open for future tightening if financial markets rally into the year end, labor markets stay tight and improvements in inflation stall,” says Hundahl, “but the Fed would prefer to keep the level of rates restrictive for a longer period than expected today.”