Newspaper archives are cruel and there is no need to go back very far. A year ago, the omens for 2023 were rather ominous.
With inflation that in autumn had been the highest in 40 years, interest rates at levels never seen in the history of the euro (in the US we have to go back to the Alan Greenspan era) and technology companies that announced waves of layoffs, the outlook for equities was not the best, while the war in Ukraine was a threat to energy costs and the price of oil. Skepticism was confirmed when the collapse of Silicon Valley Bank came in March. In short, it was clear that 2023 was going to be a year of gritting our teeth and crossing our fingers to weather the storm.
However, none (or almost none) of all this has happened. “It has been an abnormal year. We have not got it right,” some analysts who met at the Barcelona Stock Exchange in recent days humbly acknowledged. The SP500 index, the most representative of Wall Street, closed with a double-digit return, more than 20%. The Dow Jones has hit all-time highs. The Nasdaq experienced a boom with a revaluation of more than 40% and is at the highest level since its birth. In Europe too, investors can be satisfied. The Eurostoxx50 and the Ibex end the year with increases of 23% and 19% respectively, and the German stock market is at its highest.
A year ago, 70% of the economists consulted by Bloomberg predicted a recession in the United States. Well, this did not make an appearance (yes, there was a weak quarter in the eurozone), and both in the EU and in the land of Uncle Sam, full employment continues. Regarding inflation, central banks have had to revise their forecasts downwards and now consider it controlled and close to the 2% objectives by the end of 2024 or 2025. Fixed income, one of the great promises of the 2023, after climbing positions in the first part of the year, has lost some steam. The 10-year United States bond, from close to 5%, has fallen to just over 3.8%, and the Treasury bills that were so successful in Spain also failed to protect the investor from the loss of purchasing power in real terms. .
And the oil? He has been the great absentee. Despite the OPEC cut, their prices are not rising. And now on the international stage we find ourselves not with one war, but with two (the one in the Middle East). Prices did not even come close to reaching the $150 per barrel that the most pessimistic had predicted. In the end, it was bitcoin (more than 150% increase) and orange juice (more than 70%), two assets subject to speculation, that offered the best returns of the year. So we find ourselves with a resilience that was not only difficult to foresee, but now there are those who wonder if we are not erring on the side of excess optimism. This was said by the vice president of the ECB, Luis de Guindos, who a few weeks ago warned that this excess of confidence could be a kind of self-fulfilling prophecy.
Why were the experts wrong? It was one of the questions that was debated in Barcelona at the Market Forecast organized by the Institut d’Estudis Financers (IEF)-Barcelona Finance School and the Barcelona Center Financer Europeu a few days ago. There is a joke that says: “The same ones who laugh at fortune tellers take economists seriously,” but the truth is that there was some error in evaluation about the tailwinds that supported the economy in 2023. “The forecasts They fell short and the cycle was atypical. The effect of the savings cushion accumulated during the pandemic was underestimated,” indicates Joan Ramon Rovira, head of the Chamber of Economic Studies Cabinet.
Victor Alvargonzález, from the independent manager Nextep Finance, points out that “analysts and investors ended up confused by the message from Jerome Powell's Federal Reserve of higher for longer” (“higher for longer”, referring to interest rates). Many believed it but the reality is that it will not be like that, because in 2024 three cuts are already planned.
One of the factors that caught more than one person by surprise was that the transitory elements that supported inflation in 2022 abruptly evaporated. Like the bottlenecks of maritime transport, whose rates have already returned to pre-pandemic levels in a few months after the funnel caused by covid.
We also have to put the good results of 2023 into perspective. Are they that good? In fact, much of this year's gains are due to the Magnificent Seven, or the Seven Sisters. The giant technology companies on Wall Street: Apple, Alphabet, Amazon, Meta, Microsoft, Nvidia and Tesla account for almost half of the revaluation experienced by the SP500, thanks to the impact of artificial intelligence (AI). “It would be almost more correct to talk about an SP7 stock index,” comments Jordi Justicia, general director of Ginvest Asset Management.
One reason for optimism ahead of 2024 is that this innovation is destined to set the tone for years to come. According to studies by McKinsey and Capgemini, generative AI can boost business productivity by between 30% and 47%. These improvements will be transferred to the companies' accounts and, therefore, to the price of their shares. For Alvargonzález, we are in the fourth industrial revolution and if technology benefits in 2023, the year we enter this advance will spread to other sectors, such as financial services. Along the same lines, Jordi Justicia suggests that we will have to look at smaller companies with growth potential that will join this technological wave by taking advantage of its future applications. And he resorts to a metaphor: “Those who became rich were not those who found gold nuggets in the rivers, but those who made picks and shovels.” A study by Mirabaud says that the share of AI in the global IT budget in 2024 will increase from less than 1% this year to 8%-10%.
And now, reasons for pessimism. First of all, geopolitics. It is true that now the war between Israel and Hamas seems localized and the one in Ukraine does not register progress or news: the markets have already digested it. But it was already seen how the uncertainty in the Suez Canal caused a 10% increase in freight in one week. The dangers of another spike in inflation are real if the conflict spreads to Iran. Likewise, the evolution of increases in labor costs, higher than those in productivity, could also delay the expected decline in inflation.
Secondly, one of the engines that helped the cycle in 2023 will be turned off. Fiscal stimuli, which supported consumers but caused increased debt, will be phased out. The reduction in public spending will have effects on growth. It must also be taken into account that central banks will stop buying state debt indiscriminately, which will force countries to carry out some adjustment.
When it comes to the price of money, there is no need to claim victory either. Investment banks such as Citigroup, Deutsche Bank or Wells Fargo consider that the effect of high rates has not yet been seen, because they take a year to manifest. And this could cause a – mild – recession in the US. Furthermore, if central banks were slow to react when inflation rose, this time they will think long and hard before lowering. Adrià Morron Salmeron, economist at CaixaBank Research, recalls that “the tone of the central banks is clearly oriented against inflation and in the eurozone there is still a way to go,” he says. “The current market narrative discounts a return to a Goldilocks economy,” he notes. That is to say, an economy that is neither too hot nor too cold.
And third argument for the pessimists: a resurgence of global protectionism that affects trade. A trade war with China, if Trump wins again and if populist parties increase their influence after the European elections, would make imports more expensive and hit consumption and investment. To find out how it will end, next appointment at the end of 2024. Stay tuned. Stay tuned.
