I’ve never been big on setting New Year’s resolutions. It’s just not my thing.
Starting each year with a set of lofty goals is a great way to set ourselves up for failure. Instead, I believe in small, incremental and sustainable changes that eventually compound into something incredible.
And if we want to improve ourselves there’s nothing stopping us from starting at any point of the year.
But I do like to use this time of year to slow down and reflect on what’s happened. Doing this will help us identify trends and momentum, two things that tend to continue.
If we can do that we can hopefully better position ourselves for success in achieving all the awesome stuff we want to do in the coming year and beyond.
So in this post I’m going to focus on macro trends I’m seeing and thinking about and how those might shape 2024.
Then, next week I’m going to focus on trends in my own professional, personal, and financial life. The goal is the same… understand where we’ve been so we can better shape where we’re going.
If these don’t sound like interesting posts to you, I totally get that. I’m a big believer in writing. There is no higher ROI activity you can do.
I’m hoping this and my next post give me clarity to have a more successful 2024 than 2023. And if it helps you and forces you to do a similar exercise, well, I’d be thrilled!
The Macro Trends Of 2023
2023 was an exciting and interesting year. In an effort to combat inflation, the Fed ramped interest rates to levels we hadn’t seen in decades.
The stock market was “supposed” to crumble under this new interest rate environment but returns for all major indices have been nothing short of phenomenal:
But it’s a bit unfair to look at annual returns in a vacuum. If we push out to a 3-year timeframe we see how ugly things were looking coming into 2023:
The last two years have been pretty wild with stocks falling hard from their January 2022 peak and then whipsawing back throughout 2023.
The only index not fully participating is $IWM, the small caps (more on this later).
And we’re starting to see similar whipsaw action when it comes to mortgage rates. Here’s the 30-year fixed rate over a 3-year period:
Now, mortgage rates haven’t returned to our January 2022 levels, and I don’t expect they will in 2024.
There’s just no good reason for the Fed to bring interest rates down THAT low. Despite what so many folks seem to believe, the economy is doing just fine.
Home prices are also holding up extremely well with prices a couple percentage points higher than they were this time last year:
In short, 2023 caught a lot of people off-guard. Hell, we were all but guaranteed a recession!
Calls for it were so strong that in June 2022 searches for “recession” hit their highest levels in Google’s search data history:
It didn’t come.
People love to be pessimistic even though the pay is garbage. I’ll never understand it.
So what does all this mean for 2024?
Given the trends, it seems like a fair bet that a number of things are likely to happen.
The Stock Market Will Likely Continue Heading Higher
When prices broach all-time highs they tend to keep going.
Why?
There is far less selling pressure. Literally everyone is in profit. Let it ride!
An object in motion tends to stay in motion, afterall.
Beyond that, we’re also heading into an election year. Historically, stocks tend to go up an average of 8.4% during the year of a Presidential election.
So we have stocks trending higher into a year that’s historically good for stocks.
Call me simple, but I like those odds.
Will Small Caps Outperform?
Within all themes there are micro themes. I believe that while we’ll see the stock market head higher in 2024 we’ll likely see small caps play some catch up.
The first reason for this is simply a reversion to the mean.
Here’s a 20-year chart comparing $SPY and $IWM:
It’s been a long time since $IWM has outperformed $SPY and the gap between these two has grown quite extreme as of late.
Second, as inflation cools, companies’ ability to push prices increasingly higher is becoming limited. We’re seeing that already with General Mills reporting trouble with price hikes and adjusting their annual sales forecast substantially lower.
Inflation is actually great for big companies. Counterintuitive, right? But as inflation cools the party is winding down.
That’s perhaps good news for smaller companies. And this may just be the catalyst for $IWM to mean revert a bit in 2024.
All-Time Highs For Bitcoin Incoming
Small caps tend to have higher beta, meaning they move up and down in bigger swings than large cap companies.
In other words, they’re considered more risky.
So if we believe the stage is set for stocks to rise and small caps to outperform in 2024 we should also consider what risky assets might participate alongside them.
For me, bitcoin and crypto immediately come to mind. This sector is by far the most “risk on” play investors can make.
Bitcoin has been on an absolute tear lately, up over 160% year-to-date.
Another 60% and bitcoin is trading at all-time highs.
That sounds like a lot, and it is. But ultra high beta assets can move sharply, and that’s exactly what we’re dealing with here.
And, like all good trades or investments, our thesis is supported by potential catalysts.
Bitcoin ETFs Are All But A Given
It’s no longer a question of whether a bitcoin ETF will be approved.
In fact, we’re in the final innings of approval on what will likely be several bitcoin ETFs come the new year.
While some might try and spin this as bad news for bitcoin in general or bad for crypto exchanges, that’s just pessimists being pessimists.
The reality is it’s good for the industry and will likely increase demand across the board.
But that’s not the only catalyst.
The Halving Is Coming In April/May
The next bitcoin halving is upon us!
For those that haven’t a clue what I’m talking about, this is when the block reward for bitcoin miners is cut in half.
That simply means less bitcoin is minted which means less selling pressure from miners as they tend to unload their bitcoin on the open market to keep their businesses running.
Here is a great article diving into the halvings. This will be the fourth in history and here’s a nice little table showing price after the event:
The halving tends to be very bullish for the price of bitcoin. Given the current trend/trajectory, ETF approvals, and the halving coming in April or May… I like betting on the continuation of the trend here.
There are MANY ways you could play this theme, and I’ll talk about how I’m doing it in next week’s post.
Interest Rates Likely Settle Into A Historically Normal Range
I’ve been talking about this for a long time in the weekly newsletter. So if you’ve been reading that, congrats, you’re ahead of the curve!
Interest rates are likely to continue coming down, a bit, because… well, inflation is coming down:
That’s a look at the consumer price index (CPI) since about 2005.
It’s pretty obvious we went through some nasty inflation the last couple years. But it’s also obvious that we’ve been seeing disinflation since about June 2022.
While I expect this trend to continue, it may slow down.
I haven’t seen it widely discussed, but wage inflation could be the story of 2024. I’ve mentioned it several times in the newsletter. Labor strikes seem to be happening non-stop, and it isn’t just in Detroit.
Pilots for Southwest Airlines just negotiated a huge pay increase. This is just one example, and all of them have ripple effects.
So I’ve been watching wage growth. And, while it’s been coming down from a recent spike, we could very well see it settle in at a higher base than we’ve seen in recent past:
If wage growth remains elevated, say at 4% or more, is it realistic to expect inflation to get to 2% or below?
I don’t think so…
When people have more money they tend to spend more, pushing up prices.
And if we can’t get inflation back to 2%, one of two things (or both) will happen. The Fed will keep interest rates at a more restrictive level and they may change their inflation target, adjusting it higher than 2%.
To most folks this is all pretty boring stuff. So what’s it all mean?
Cash Flow Real Estate Will Remain Scarce
With higher rates in 2023 we saw cash flow markets all but evaporate. Markets like Memphis and Cleveland just “don’t work” anymore.
Those aren’t my words, it’s what I keep hearing from multiple conversations with investors every week.
While rates have relaxed a bit, and will likely come down some more yet, I don’t believe it will be enough to “make the numbers work” in most markets.
I believe we’ll see interest rates settle into the 5.0-6.0% range which will be low enough to keep homebuyers happy but high enough to keep investors frustrated.
Detroit Continues To Be Attractive
Although challenging, 2023 was a fantastic year for operating in Detroit.
I believe that trend will only grow stronger in 2024. More investors, pushed out of their previous markets by low cash flow, are looking for alternatives.
Interest rates in the 5-6% would be a sweet spot where the numbers in Detroit are strong yet lackluster in other markets.
Ultimately, this will likely push prices in Detroit higher, or at least keep a solid floor in place.
Home Prices Should Continue To Grind Higher
Speaking of home prices, they did not crash in 2023.
I know… what a baseline!
But that really seemed to be everyone’s expectation. Higher rates would kill affordability and prices would come crashing down.
Or, rates were going to crush the economy, a major recession would cause massive job losses and there would be a bunch of forced sellers that would crash the housing market.
It’s. Not. Going. To. Happen.
Even if we did have a major recession and widespread job losses, I do not expect we’d see a housing market crash.
Why?
We’ve done that. We know how painful it is. And I don’t believe “they” would let it happen.
There would likely be a bunch of forbearance options and, if needed, government assistance to prevent a widespread housing crash.
Beyond that, many folks are sitting on interest rates they believe we may never see again in our lifetimes. They will fight like hell to keep those interest rates.
In 2008/2009 it was an easy decision to dump your underwater house and rent something for less than your mortgage payment.
That’s not the case today, and it likely won’t be the case if we were to have a recession in the near future.
So with everything we’re projecting at this point… a rising stock market and slightly lower interest rates for 2024, let’s take a look at housing prices again:
Notice we are higher than we were at this time last year but we did NOT break all-time highs in housing prices that we saw in 2022.
That very well may change in 2024. And if it does, gosh imagine the headlines!
“Housing Prices Most Expensive In History”.
Forget the headlines, imagine the anger from the pessimists!
Sometimes the best prediction to make is the one that would upset the most people. Housing prices at all-time highs sure would upset a lot of folks.
After successfully navigating a year in which we SHOULD have seen housing prices come down, it’s hard to imagine what could derail this trend.
A resilient market is not one you want to bet against. I’ve learned that lesson the hard way. And the housing market has been incredibly resilient in the face of some serious uncertainty.
Housing Inventory Will Continue To Be Historically Tight
In recent months we’ve seen some improvement in year-over-year active housing inventory.
But even still, these improvements are hardly moving the needle. Inventory is still at historically low levels and I’m not sure what the catalyst will be to get us back to “normal”.
[chart here]
You’d think this data alone would be enough to convince folks that there’s no indication of an imminent housing market crash.
I mean, we all understand basic supply and demand, right?
I digress…
The reality is, if we’re taking the approach that trends are strong and difficult to reverse (they are) we’d need to see a trend not only start to change but, ideally, a catalyst that would help aid that change.
You could argue that higher interest rates have helped change our inventory trend. But if you’re being objective you must recognize it’s done shockingly little to improve active housing inventory.
And now that rates are easing a bit you have to wonder if we’ll start 2024 with enough increased buyer demand that we undo our inventory improvements.
In other words, lower rates could be a catalyst that keeps the low inventory trend intact.
I honestly don’t know if inventory continues incrementally improving or slips back to even lower levels. The reality is I don’t care because trends are not speed boats. They are aircraft carriers.
It takes a lot to turn an aircraft carrier. And I expect that 2024 will be more of the same when it comes to housing inventory.
The Sun Sets On 2023
2023 was a fascinating year when it comes to macro economics. I doubt 2024 will be so interesting from the same vantage point but I’d love to be wrong.
My guess is 2024 will feel boring on many levels. Stocks will grind higher, interest rates will come down a bit but not enough to get folks excited, and housing inventory will remain lackluster.
However, below the surface might just be where the excitement happens.
Sub-themes like Detroit real estate, small cap stocks, and bitcoin might be where there’s money to be made in 2024.
These are definitely the themes on my mind and where I’m positioning for the new year. I’ll talk more about that as well as some of my 2023 failures in next week’s post.