What caught my eye this week.

Well that could have been a lot worse, eh? Remember: at the start of 2023 we were assured that both a terrible recession and most likely further stock market falls were all but nailed-on.

But as things have turned out, the global economy has held firm. Even in the UK, where consensus forecasts were for a 1% decline in GDP versus the 0.5% advance that economists now believe we’ve seen.

Hardly a rip-roaring year – and I’m putting aside the high-profile conflicts making life miserable for various millions right now – but I think anyone would have taken it in January.

As for stocks, US equities have chalked up a barnstorming recovery, led until very recently by the so-called ‘magnificent seven’ tech giants. These genuinely great companies look pretty expensive today – just like they did in December 2022, before they soared.

Passive investors who shrug and say “who knows?” are smarter than they sound.

Mystic missive

So what will we see in 2024?

Who knows! (See, I can be a clever clogs too).

But if you’re a sucker for disappointment you could have a read of Vanguard’s 2024 forecast.

This 24-page PDF is mostly focused on the prospects for the future path of interest rates – an editorial decision which is in itself a kind of prediction.

Indeed perhaps the report’s most strident declaration is that ‘bonds are back’:

The transition to a higher real interest rate environment has challenged investors in the last few years, leading to negative bond returns in both 2021 and 2022. Central banks increased policy rates at the fastest pace in decades and yields increased by 300 basis points or more. Long-term yields – a strong predictor of expected returns over the long-term – are now back at levels last seen before the GFC in 2008.

This development has raised our expectations for fixed income returns significantly, to around 5% on an annualised basis over the next decade, for UK aggregate bonds and global ex-UK aggregate bonds (hedged).

As a result, our outlook is better than it has been during the past decade.

Higher forward returns are of course the silver lining to the unprecedented price declines for bonds that we’ve seen over the past couple of years:

None of which should be a shocker to Monevator regulars.

We stressed much the same thing a year ago and have written more about bonds in the past 18 months than in the preceding 15 years…

Britain not a bargain?

Finally, on a provincial note the fund giant is curiously contrarian on the apparent cheapness of UK equities.

Vanguard says:

…our views are reflected in the declining expected valuations in our 10-year annualised UK equity return forecast.

Despite some expected rate relief, price/earnings ratios must ease somewhat for UK equities to return to fair value.

Now you know what passive investors say…

…who knows.

But as a dumb and naughty active investor, I have more in (select) UK equities going into 2024 than for many years, albeit mostly in companies with a global outlook. So I’ll be studying Vanguard’s contrary view closely this weekend, as I work my way through the post-Christmas chocolate hoard.

Hope you have a great New Year’s Eve – whatever your expectations are for the 12 months to come!

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What caught my eye this week.

Perhaps Jerome Powell should do a stint on Strictly Come Dancing when he retires from the US Federal Reserve?

The Fed chair would surely be an audience favourite. No dull waltzes or clunky rumbas from him. Think more the quickstep, with its rapid movements and sudden turns.

Because after hiking the US Fed funds rate at a the fastest clip in modern history, Jerome has suddenly pivoted.

A few weeks ago he wavered when put on the spot about whether US rates would have to rise further.

But this week he spun. The Fed is done.

Joy to the World

Well, probably. You never quite know what will happen on the dance floor – it’s an interaction not a solo show, after all – and we can’t be certain that rates have been lifted enough to tame US inflation for sure.

But it looks that way and markets seem to have made their mind up.

Here’s the yield on the US 10-year Treasury – perhaps the single most important metric in the investing world:

Source: FT

At the end of October the US 10-year yield was tickling 5%. While inflation turned long ago, the Fed still didn’t seem convinced that it had definitely seen off a price spiral. Everyone was gloomy.

But six weeks later and the yield is down by a full percentage point! If this is a head fake then we haven’t seen the like since Yoda tried to convince Luke he was just another space fraggle.

The equity markets seem persuaded. They’ve been flying for a fortnight:

Source: Google Finance

Then again the US indices have been advancing all year – mostly thanks to the very largest tech stocks. The S&P 500 is now up 23% and the Nasdaq by 43%. The damage inflicted by the 2021-2022 rout is mostly repaired, at least in nominal terms.

Of course the FTSE 100 is under-performing in this latest rally. Indeed it’s barely positive for the year.

But that’s almost reassuring. Seeing the UK’s ever-moribund index topping the leaderboard in 2022 was the investing equivalent of a dread blood moon.

Go Tell it on the Mountain

For what it’s worth I agree inflation is probably yesterday’s news, at least in the US.

Money has become much dearer over the past 18 months and the pain has been widely felt. Many commentators claimed the US needed to see a big recession to undo the supposed ‘excesses’ of the pandemic era. But I’m not convinced that historical comparisons were very useful this time.

I always sided with the argument that inflation was mostly driven by supply shocks caused by unprecedented rolling shutdowns around the world in response to Covid. Much more so than by low rates and pandemic support from governments.

The latter was particularly unconvincing, and seemed a politically-motivated charge. Of course some governments pumped cash liberally into their flailing economies, but others didn’t and the whole world got inflation just the same.

Anyway it’s not like fiscal support threw gasoline onto a raging bonfire. Has everyone forgotten the zombie state we were living in for most of 2020 and well into 2021? Talk about depressionary forces.

My economic metaphor throughout the pandemic was of a cranky machine juddering and spluttering as it lurched in and out of life. I had a particular machine in mind here – an ancient ‘collator’ that we used to stitch together the pages of my student newspaper. If that machine could moan so much in just an evening, it’s no wonder that just-in-time supply chains foundered from worldwide commotion.

Moreover 20 years of reading company reports means I’m very familiar with how a single supplier going bust or a flood at a warehouse can derail a firm’s operations for months.

So yes, China going offline for long spells probably gummed up the works.

Still, I was in camp ‘inflation is transitory’ and it wasn’t. At least not over the timescales people were using. So no cigar.

In the history books, our recent spurt of inflation may one day look like a blip. But it hasn’t felt that way – not in our portfolios or at the supermarket.

Hark the Herald Angels Sing

Who knows what this all means for our portfolios? US markets look quite expensive again and the rest of the world reasonable value. So it’s back as you were on that score.

As a stockpicker I’m finding a UK market littered with apparent bargains. Some of these cheap shares and discounted trusts will be holed below the waterline, but the sell-off has been too widespread for this not to feel to me like an opportunistic time to buy.

And then there’s fixed income. This time last year I reminded readers that the steep sell-off in bonds we’d seen was not a reason to avoid bonds in the future. If anything the opposite, as higher yields promised better returns to come.

Indeed if inflation falls faster than expected in the UK then gilts could put up very nice returns in 2024.

I still suspect we have a stickier inflation issue than the US thanks to our own self-inflicted troubles, but nevertheless we could eventually see (relatively) striking returns here, especially from longer duration assets.

But the thing about the future is it’s uncertain and confounds.

My self-proclaimed insights into inflation and the rocky road to come in early 2022 didn’t stop my portfolio getting shellacked. Equally, at today’s valuations US inflation could hit target and rates could even be cut – and US shares might still go south.

As ever it’s a long-term story that most investors are better confronting with a plan not hunches. Keep investing through thick and thin, stay diversified, and rebalance as required.

If you want excitement, try the tango.

Jingle Bells

This is our last regular post until Weekend Reading on Saturday 30 December. I’ll have a Moguls post out next week for the hardcore though, so look out for that if you’re a member.

In fact this feels like a good time to thank everyone who has supported us by becoming a member. You’ve had some decent additional content – especially from my co-blogger – and enjoyed ad-free browsing on the website. We’ve earned a few extra quid that is making this site more sustainable at last.

We’re not quite there yet. But presuming you don’t all cancel and we continue to sign-up new members at the current rate we should hit our target by summer. A big relief after 17 years of blogging without a viable business model for us.

You know what to get us for Christmas!

Thanks too for reading this post and all our others in 2023, for directing friends and family our way, and for the thousands of comments over this year that have often added as much value as anything we wrote.

Enjoy the festivities, wherever and whoever you are!

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