Markets came to a stellar end in 2023, sidestepping the burden of inflation and interest rates to post strong returns for the 12 months to 31 December 2023. This article reinforces the lesson that you are better to plan for what might happen rather than trying to predict what will.
At the beginning of 2023, most economists’ consensus was a looming recession which would put downward pressure on share markets. Twelve months later the reality is quite the opposite. Most equity markets hit all-time highs at the end of 2023, the S&P 500 gained over 26% for the year, significantly exceeding most predictions, the MSCI All Country World Index rose over 22% even as geopolitical tensions increased, and the ASX 200 returned over 12%.
It was a year that defied expectations by many accounts. A number of forecasts predicted that the US economy would enter a recession in 2023 as the Federal Reserve raised interest rates to fight high inflation. But the economy remained resilient, inflation eased, and the Fed declined to lift rates later in the year. Many economists who called for a recession have since walked back their predictions. This underscored that guessing where markets may be headed is not a reliable way to invest.
Unfortunately, many potential investors missed out on these excellent returns because they were trying to time their entry into investment markets, often out of fear of losing money. Others hoped to make money by picking the bottom. If they got their timing wrong and invested in November or December, they picked the market top.
What’s in store for 2024?
Economic resilience in the US and elsewhere is helping boost the global outlook for 2024, but as investors learned last year, the only thing certain is that there will be plenty of uncertainties. Many variables are in play for markets this year, from wars in Ukraine and the Middle East to questions around interest rates. Investors are also likely to be closely following the upcoming presidential election in the US. But it’s worth noting that the political party that wins the White House is just one of many factors investors consider when pricing assets, and sharemarkets have generally trended upward regardless of which party holds the presidency. This may be reassuring when one considers the difficulty, or perhaps futility, of trying to guess what is going to happen in 2024—or any year.
So, as we look ahead of 2024, be prepared for a barrage of forecasts in the coming months telling us what will happen to the economy, growth, inflation, unemployment and what all that will mean for interest rates, shares, bonds, currencies and commodities.
To be fair, these views are often interesting and entertaining to read. It’s quite valid that people have different opinions on where markets might head. That’s what makes a market, after all. But it’s not really the basis of an investment strategy, as we’ve seen. What are sold as forecasts are really just assumptions. They can be based on many different variables. If any one of those variables changes – say oil prices jump over $US100 a barrel – a lot of other pieces of the puzzle can come unstuck very quickly.
If you can’t predict the news or prices, what can you do? We know that the average return in the equities market over the past century or so has been around 10%. It’s not like that every year, of course. There’ll be good years and there’ll be bad years.
But those returns are available to disciplined and diversified long-term investors who count on the ability of human ingenuity in many areas of life to solve big challenges – like the energy transition or biomedical breakthroughs or sustainable food production. Being a long-term investor gives your opportunity to share in the wealth created by those innovations.
The moral of the story? It’s hard to invest and stay invested during volatile times, but disciplined investors tend to be well rewarded by acknowledging there will always be uncertainty. We can’t predict what will happen, but we can build life-long financial plans that are able to deal with what might happen.
Last year was a vivid example of why such advice makes sense.
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If you have any questions/thoughts in relation to this article or have a need for some advice and would like to discuss your particular situation, please contact Gordon Thoms or David Conte at Calibre Private Wealth Advisers on ph. (03) 9824 2777 or email us here.
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