Investors are getting ready to wrap up a winning year on the stock market. Through Nov. 17, the S&P 500 (^GSPC 1.02%) is up 18%, well ahead of the 10% average price gain for the broad-market index. That increase has come despite interest rate hikes from the Federal Reserve, persistent inflation, and geopolitical tensions, showing how unpredictable the stock market can be.
Looking ahead to next year, it's only natural to ask what's in store for the stock market in 2024. That's especially true as investors still face many of the same macroeconomic concerns that have hovered over their heads throughout this year.
Interest rates remain elevated, which has squeezed the housing market, business investment, and consumer spending. Fed Chair Jerome Powell has signaled they will remain elevated until inflation approaches 2%, and some economists are still forecasting a recession next year.
There are also signs that consumer spending is weakening, partly due to the restart of student loan payments. Most economists, businesses, and the Federal Reserve seem to believe that 2024 will mark the nadir in the current economic cycle. However, a stock market crash next year, which is not a well-defined term but could mean a slide of 20% or more, seems unlikely for several reasons.
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1. Interest rates are expected to start coming down
Interest rates and stock prices tend to have an inverse relationship. When interest rates rise, stock prices generally fall and vice versa. That's because investors tend to move money out of the stock market and into the bond market when interest rates are up, and rising interest rates act as a brake on the economy. Falling interest rates, therefore, beckon money back into the stock market as bond yields fall, and lower rates provide a tailwind to economic growth by making it easier to borrow money.
The recent market rally is due to the investors' belief the Fed won't raise rates anymore as inflation is falling and the economy is softening. While we won't get an update from the Fed again until December, the central bank forecasted in its September "dot plot" that the Fed funds rate would fall by 50 basis points next year. That was higher than the previous forecast, indicating the central bank expected rates to stay higher for longer.
Overall, a "soft landing" -- inflation normalizing without a recession -- seems increasingly likely.
2. Growth at big tech companies is accelerating
The "recession" in the tech sector has already come and gone. Big tech companies like Amazon, Alphabet, Microsoft, and Meta Platforms all announced layoffs roughly a year ago and have seen sales and profit growth mostly accelerate over the last year. The tech industry was challenged by the end of the pandemic, but they've right-sized their costs and enjoyed a boom from new artificial intelligence technologies, which could take another step forward in 2024.
How this handful of tech stocks perform is important because they make up a sizable portion of the S&P 500 and have an outsized influence over how the major indexes move. If they remain healthy and continue to deliver solid growth, it will be difficult for the stock market to crash.
3. The economy still looks solid
While much uncertainty remains, the baseline economic data is encouraging. The unemployment rate is still under 4%, and it's been that low for 16 months -- one of the longest stretches of low unemployment in U.S. history. Meanwhile, gross domestic product (GDP) grew at an annualized rate of 4.9% in the third quarter, showing that overall economic growth remains robust despite elevated interest rates and other concerns.
While some sectors like real estate are currently struggling, the overall economy still seems to be on solid footing, making an economic crash unlikely in 2024. That, in turn, means the stock market probably won't experience a sharp pullback either.
Volatility is the price of admission
Smart investors know the stock market will almost certainly help you generate wealth over the long term, but it's much more unpredictable in the short term. While there's some visibility into what the economy will look like in 2024, plenty of things could still change that, including expanding global conflicts, a political crisis, or a black-swan event like the pandemic.
Stock market investors need to accept some uncertainty in exchange for getting returns above the risk-free rate over the long term. There's still plenty of risk heading into 2024, but given the current trajectory and the economic facts on the ground, a stock market crash is unlikely. It's certainly no reason to avoid investing in stocks next year.
