Continued Readjustment Defines 2024 Financial Trends

In late 2022—with speculation of further interest rate increases, rising inflation and global political turmoil—more than a few economists predicted that the world economy would drop in 2023.

A recession never came—yet despite strong job numbers, inflation moving toward the Federal Reserve's target and interest rates that refused to skyrocket, widespread anxiety about the economy persisted throughout 2023. This was likely because, after a decade of strong economic growth and low rates leading up to the 2020 pandemic, the economy began recalibrating to patterns more in line with historic norms in 2023. As it did, consumers simply weren't geared to notice that instead of being in danger, they were simply undergoing a period of readjustment—which often requires anxiety management.

This year is on track to continue the theme. To understand why, First Citizens' Premier Relationship Banker Gina Lee, Director of Market and Economic Research Phillip Neuhart and Regional Mortgage Sales Manager Chris Shugart break down some of the biggest trends and topics heading into the new year that indicate a sequel to the stabilizing and overall financially positive 2023.

Politics and policy

If attitudes in 2023 were fueled by anxiety over Fed rate hikes, 2024 is shaping up to be a year of anxiety over the impact of politics on economic growth trends.

"Elections matter, but how much they actually matter versus how much people think they matter—those are two different things," Lee says. She ranks investors' ability to separate the effect political developments actually have on the economy from how they feel as individuals about those developments as more influential to 2024 economic trends than the outcome of an election.

Neuhart agrees. "There's no avoiding Washington being top of mind this year, but in my experience elections are sometimes overblown by investors—because in the end, markets return to fundamentals," he says. "The percentage of questions I get related to elections versus how much they matter is somewhat out of whack compared to the importance of the budget deficit, the legislative schedule or proposed changes to climate regulations, for instance."

While Shugart doubts that big legislation like last year's SECURE 2.0 Act will come into play during a presidential election year with a split Congress, he does believe ongoing regulatory rollouts like Basel III—a set of measures enacted after the 2008 financial crisis to strengthen banks' regulation, risk management and supervision—should be watched as closely as elections.

"If the next phase of Basel III goes forward as proposed, banks are going to be less likely to lend on home mortgages," he says. "This could lead to elevated rates and the separation of 30-year fixed-rate mortgages from the bank portfolio market, which would be huge."

Inflation and interest rates

While Neuhart doesn't believe inflation will hit the Fed's target of 2% in 2024, his general forecast is optimistic.

"Inflation was at 9.1% in June of 2022, and now it's year-on-year projected at 3.3% with the expectation to further moderate to about 2.5% in the last half of 2024," he says. "That 9% to 4% drop is a substantial accomplishment, but getting from 4% to the Fed's 2% target is like shedding that last 10 pounds when you're on a diet. Those last few pounds are always a bit stickier and tend to take longer to lose, but that final challenge doesn't cancel out the progress you've made.”

While the effects of upcoming rate decisions are a bit more difficult to gauge, Neuhart points to recent tweaks as a starting point for measured speculation on Fed rate hikes or cuts. "July was the last Fed hike, so going into the new year we've got a pretty long plateau in terms of elevated rates," he says. "That makes a no-cuts, higher-for-longer scenario likely unless something changes prematurely with the fundamentals of the current economy."

Supply chains

Supply chain difficulties have been making headlines since 2020. Although many consumable and durable goods have failed to come down in price, 2023 showed strong improvements that indicate stability in 2024.

"People might take prices not coming back down on things like home builds and cars as an indicator of supply chain hiccups in the coming year," Shugart says. "But this doesn't take into account a glut of once-scarce goods like cars. Those prices have less to do with the current, much-improved health of the supply chain than they have to do with fluctuations in the labor market working themselves out."

Labor markets

If there's one thing Neuhart believes will dictate economic trends in the coming year, it's labor. "Even with a lot of baby boomers retiring and the steep drop in pandemic-era immigration still generating tightness in the labor market, participation of workers aged 25 to 54 is actually above 2019 levels heading into 2024," he says.

Neuhart notes that the perceived pinch is more structural than cyclical. These circumstances may actually offer a beneficial dose of wage inflation that could send consumers—and the overall economy—into 2024 with a bit of a boost.

"Manufacturing may have slowed, but 70% of the economy is consumption. Consumers are heading into 2024 employed and spending," he says. "Labor's still somewhat tight going into the first quarter, but it's just as strong as it was in 2023—and the strength of labor is largely responsible for having kept us out of the recession that so many were predicting this time last year."

Equity investments

Neuhart believes historical perspective may also help ease some of the anxieties around the markets.

"People may be nervous about movement in the markets, but if you look throughout history it becomes pretty obvious that the easy monetary policy we've had since the recession of 2008 is an outlier," Neuhart says. "Ten-year treasury bonds yielding about half of a percent in the summer of 2020—that was a distortion of how things work."

The next 12 months are positioned to be a continuation of what he believes will be 2023's organic, if sometimes bumpy, recalibration of markets to operating within the norm. "Plot the S&P 500 against bond volatility for the past year, and the close correlation really points in the direction of a readjustment to the historical rate environment," Neuhart adds. “Bond volatility rose and stocks sold off, bond volatility dropped and stocks rallied—so if we keep moving toward the Fed's 2% target and rates stabilize, we'll level off."

The housing market

High home prices, low supply and interest rates climbing above 6% contributed to the housing market feeling stuck in 2023. As with the investment sector, early promising signs indicate that what seemed like a slowdown may actually be an informal readjustment to the historical rate environment.

"One positive indicator is boomers are getting more comfortable with the rate environment as it drops back down into the sixes," Shugart says. "If this trend continues, I anticipate some real velocity that gets the housing market unstuck as they begin downsizing."

Shugart estimates that 12 to 18 months of adjustment to the new rate environment may be enough to produce a sustained silver boom of downsizing that shifts housing back into gear.

A shifting mindset is also crucial in order for this boom to occur. The more time that passes from those initial rate hikes, the more Lee sees the sticker shock of seemingly higher mortgage rates start to wear off.

"I'm seeing increased residential construction to counter low housing supply," she says. "People are starting to accept that even with higher borrowing rates and reduced supply, life has to happen—so they're gradually going ahead with building that second home or beach house."

Commercial real estate

Stories about office buildings selling off at deep discounts were common in 2023. While they varied by region and type, commercial real estate prices continued the year-over-year declines that kicked off in late 2020.

Context is crucial in order to assess the prospects and risks of this market in the coming year. Neuhart cites $1.5 trillion in commercial real estate coming to maturity by 2025 as one of the key indicators to watch when gauging a potential recession. Despite this important consideration, he says the story of how commercial real estate markets may play out in 2024 is a complicated one—and one that's in no way fully written.

"Whether it's commercial or residential, there are so many details that it's hard to make anything more than a very broad generalization," Shugart adds. "Charlotte is not San Francisco, and an industrial site is not the same as an apartment complex. So much of commercial real estate isn't apples to apples."

The bottom line

Predicting what the markets will do is notoriously tricky, even for experts. Getting a handle on your economic anxiety as the markets work to settle into familiar patterns is a bit easier—and likely more important.

Rule number one is to take a step back from the 24-hour news cycle, which can create concern about situations and circumstances beyond your control.

"Markets tend to remain efficient in the face of whatever's going on," Neuhart says. "Look at past geopolitical events back to World War II, and you'll see that the period of time around which markets react to big events is actually pretty short. That's why understanding the markets beats trying to outsmart them."

Lee agrees. "At First Citizens, our concern is building relationships that help manage the fears and anxieties that confront clients in transitionary times like these," she says. "Markets will work themselves out, and as they do we can help our clients navigate whatever the future holds."