Towards the end of the calendar year, there’s a natural tendency in the financial media to look both back and forward – back on the events of the past 12 months and forward to what we imagine the coming year might hold.
The assumption is we reach a transition point in December, and there is some sort of dividing line between this year and the next. Of course, this is entirely arbitrary. Events are always unfolding in real time, and what happens in one 12-month block has no automatic bearing on what happens in the next.
But those are the dictates of media publishing schedules. Newsrooms tend to thin out over the holiday season in December and January, so a lot of material for the summer months is prepared ahead of time. That is why forecasts are so prevalent at this time of the year.
What was forecast in 2023
If we go back to early 2023, the financial news service Bloomberg published its annual ‘Almost Everything Wall Street Expects’ year-in-preview article. As is usual with these things, the legions of forecasters had something for everyone.
One analyst said a hard economic landing looked “unavoidable”. But another said the global economy’s “resilience may surprise”. One said global equities would “plunge as recession hits”. Another said shares would remain “range-bound”. One said the US dollar would fall from its perch. Another said the relative growth outlook supported further US dollar gains. If there was anything close to a consensus forecast, it was the increasing risk of global recession.
To say the article was head-spinning is an understatement. But the range of views, many well-reasoned and supported by evidence, should not really be a surprise. That’s the nature of markets. They represent the opinions of millions of participants with often wildly contrasting views about what might happen next.
And what did happen next? Well, what always happens. News and other information came into the market and was absorbed into prices. Much of that news was unexpected – that, after all, is the definition of news – new, unexpected and noteworthy events. Something that isn’t surprising or remarkable rarely leads a news bulletin…or moves markets.
The major headlines
If we look at 2023 in retrospect, here are some of the major news events that dominated headlines:
- January – China relaxed COVID-era restrictions and reopened its borders. Jacinda Ardern announces retirement.
- February – The US Federal Reserve scaled back interest rate rises as inflation eased.
- March – US regional bank problems arose; Credit Suisse was forced to merge with UBS.
- April – US begins a study of possible rules to regulate AI, such as ChatGPT.
- May – The World Health Organisation declared an official end to the pandemic. The RBNZ paused rate hikes.
- June – Russian warlord Prigozhin staged a march on Moscow in a challenge to Putin.
- July – US inflation fell to a two-year low, raising hopes for an end to interest rate rises.
- August – China’s economy slipped into deflation amid growing property sector strains.
- September – A rout in bond markets sent US Treasury 10-year yields to a 16-year high.
- October – Israel attacked Gaza in reprisal for a surprise Hamas assault on civilians. New Zealand elects a new government.
- November – US President Biden met China’s leader Xi Jinping in a bid to mend relations.
- December – Israel-Hamas temporary truce ends. Putin confirms running for fifth term as Russian President.
In other words, it was another eventful year in the news. In 2020, the big, unexpected event was COVID. From 2021, it was the emergence of inflation. In 2022, it was Ukraine.
If you believed many of the forecasts at the start of 2023, a global recession looked to be on the cards this year. Yet, confounding the forecasters, the US economy continued to perform relatively strongly. In the third quarter of 2023, in fact, official figures showed it growing at an annualised rate of 5.2%.[A1] That’s a long way from recession.
Forecasts for New Zealand
New Zealand, too, proved resilient amid a slowdown in global activity and persistent inflation pressures. Having raised the official cash rate from a low of 0.25% to the current level of 5.50%, many expected New Zealand to go into an economic tailspin.
In December 2022, Stuff wrote an article, “Economists look ahead to 2023 with fear and anxiety.” Here are a few of the comments from the article:
- Economic growth was expected to slow to 1%, with stunted growth attributable to getting income under control.
- The ANZ bank projected an unemployment rate of 4.5% by the end of 2023.
- A weak economic outlook was put forward as a reason that the US S&P 500 Index was down almost 21% (at the time of writing in 2022).
- Bond markets had seen prices fall 10%, which was a further reason for concern.
- Housing prices were also down.
- One bank head of research said, “2023 will be the year when all the warning signs come home to roost…. What we haven’t necessarily seen yet is people taking into consideration the potential earnings hit on equities.”
To be fair, around that time, there were many such articles with equally gloomy predictions. Another on Newshub advised “Kiwis warned to ‘prepare’ as new grim picture of ‘challenging’ 2023 emerges”. This one suggested that the Reserve Bank thought unemployment would reach 5.50%, and ASB was reporting house prices could fall 25%.
By the end of the third quarter of 2023, economic activity was about 1.7% per annum growth. No recession yet. Unemployment was about 3.9% (compared to 3.6% a year earlier). House prices hadn’t come anywhere close to a 25% fall, at least outside of Wellington, and appeared to be starting to recover in the fourth quarter. Some regions, like Canterbury, were even reporting property valuation gains for the year. In the US, the S&P 500 delivered a return of over 26% in 2023, the NZX 50 was close to flat, and most bond funds had returns above 5% for the year. These aren’t exactly the kind of results that market participants originally told us we should await with fear and anxiety.
Broadly speaking, our portfolios did much better than the NZX 50 due to international diversification.
Lessons for the future
As we look ahead to 2024, be prepared for a barrage of forecasts in the coming weeks telling us what will happen to the economy, growth, inflation, unemployment and what that might mean for interest rates, share and bond prices, currencies and commodities.
To be fair, these views are often interesting and entertaining to read. It’s valid that people have different opinions on where markets might head. That’s what makes a market, after all. But, as we’ve seen, taking cues from these diverse opinions shouldn’t be the basis for an investment strategy.
What are presented as forecasts are really just assumptions. They can be based on many different variables. If any one of those variables change – say oil prices jump over $US100 a barrel – a lot of other pieces of the puzzle can come unstuck very quickly.
Forecasting prices correctly and consistently requires an ability to accurately forecast future news. We’ve never seen anyone who could pull that off. And if they could, they really should start up a subscription service – ‘Tomorrow’s News Today’.
If you can’t accurately predict the news or prices, what can you do?
We know that the average return in the share market over the past century or so has been around 10%. It’s not a consistent return every year. There will, of course, be good years and 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 to solve big challenges – like energy transition, biomedical breakthroughs or sustainable food production. Being a long-term investor gives you the opportunity to share in the wealth created by those kinds of innovations.
The fact is there will always be uncertainty. We can’t say what will happen. But we can build life-long financial plans that are able to deal with what can happen.
That’s something you can take to the bank.
With thanks to Jim Parker of Dimensional for contributing to this article.