My Big Economic Prediction for Next Year

These Sectors Will See an Influx of Money in 2024

This is the time of year when those of us who play at economic prognostication like to prognosticate economically about the new year ahead.

So, with a new year just ahead, I will now attempt to prognosticate…

I will say before we dive in that I broke my crystal ball in the move to Portugal from Prague earlier in the year. So there’s a possibility—however small—that I might be wrong. I will also say that in my own investment accounts, I have acted on the prognostications I’m about to share, so I am eating my own cooking here, so to speak.

But that doesn’t mean you should, of course.

Everyone has their own beliefs, their own tolerance for risk, their own investment needs and timelines to consider.

So what I would tell you is, at most, let these words help shape your thinking but don’t let them define your actions.

My biggest expectation for 2024 is that we see the Federal Reserve cut interest rates.

That will be the defining theme for the economy and investing next year.
As I’ve noted in too many dispatches to recall, America and Americans have a debt problem. The government, Corporate America, and Main Street families are all the most heavily indebted they have ever been, and today’s high interest rates are a significant financial burden that’s pulling money out of the productive economy.

That’s hurting banks. It’s pinching off lending activity. It’s forcing consumers to devote more of their limited income to debt-servicing payments. And it has caused Uncle Sam’s debt-repayment costs to soar to record levels, with expectations that 2024 will be even more painful for Sammy’s wallet.

Plus, inflation has retreated to a point close enough to the Fed’s preferred (and arbitrary) 2% range, so Fed chair Jerome Powell and his Powellettes can claim victory and move on.

And there’s also the fact that more central banks are now cutting rates than raising them. They’re all trying to ward off a recession or, at least, reduce its impact on local economies. As they do so, the U.S. will stand as an outlier.

The dollar, which is down nearly 10% since September 2022, will begin to strengthen again… which will make U.S. products less competitive globally… causing a slowdown at home… that, in turn, hurts sales at U.S. companies that are already saddled with excessive debt repayment costs… meaning they’ll need to raise prices to afford their debt payments… thereby rekindling U.S. inflation.

It’s all an incestuous and malevolent circle that stems from too much damn debt in the first place. But that’s spilled milk at this point.

Better for the Fed to simply reduce the cost pressures, even if marginally, to buy America some time to deal with its debt.

Which is exactly what I suspect will define 2024.

Now, I’m not suggesting the Fed will slash interest rates like some bank economists have begun predicting. We could see the Fed cut rates by one or two percentage points across 2024. The caveat there being that if we do see a significant recession, then the Fed would cut deeper.

Still, even a one- or two-point cut would bring a smile to Mr. Market’s face.
Stocks, bonds, and crypto would rally. The dollar would weaken a bit more—nothing that would be particularly painful for the greenback.

I’ve already acted on this expectation.

I recently added a real estate investment trust (REIT) to my portfolio. REITs are highly dependent on debt for their operations, and, as such, they took the brunt of the Fed’s rapid rate-hike regime between 2022 and 2023.

Banks have been slammed, too. Their investment portfolios, loaded with Treasury debt, suffered immensely as rising interest rates crushed the value of existing bonds. Moreover, higher interest rates hurt their lending activity and caused repayment stress for their borrowers.

In a world where interest rates are coming down, the pressure on REITs and banks cools.

I expect both will be among the first sectors in the stock market to see a flood of money flowing back in.

So, I grabbed shares of a shopping-mall REIT in recent weeks.

And I put some money into long-dated stock options for a regional bank. These options expire in January 2025, so I have a full year for the Fed to act. My expectation is that this particular bank’s price will more than double as rate cuts happen. Stocks options are a leveraged play on that. (I won’t name either because I’m not specifically recommending you go buy them.)

If I’m wrong, well, the options will expire worthless, but I didn’t spend a ton of money on them, so I’m OK with that possibility.

As for the REIT, it has likely seen its low. The shares stabilized in the mid-teens, where I bought them, and I’ll be quite happy owning this REIT long term and collecting a 5.5% dividend yield that will likely grow larger every year. I mean, it’s tied to retail, and Americans are nothing if not retail warriors who’ll go deep into hock to shop and keep up appearances. (I’m leaning toward recommending a REIT in the January issue of Global Intelligence Letter because I am so convinced that 2024 could very well be the Year of the REIT on Wall Street.)

And that’s my big economic prognostication for the year.

I think I’m on solid ground with this one.