Originally published in Stephen Dover’s LinkedIn Newsletter Global Market Perspectives. Follow Stephen Dover on LinkedIn where he posts his thoughts and comments as well as his Global Market Perspectives newsletter.
Following our year-end tradition, we bid farewell to 2023 and look toward 2024 by reviewing how our surprises for 2023 panned out and by offering what might surprise us in the year ahead. Our aim is to provoke thought by suggesting possible—occasionally even improbable—outcomes that could shift the narrative and performance of markets in 2024.
We would also like to acknowledge the influence of notable investor Byron Wien, and his well-known “Ten Surprises” annual forecast, on our attempts to see into the future. While we lost him in 2023, his inspiration will live on.
Looking back at 2023
Our brief review of last year’s newsletter reveals a few we nailed, and some where we mostly hammered our thumbs.
We anticipated that blockchain would go mainstream. Judging by some of the most headline-grabbing events in the world of cryptocurrency, including Sam Bankman-Fried’s conviction or the heavy fines levied against the crypto platform Binance, it would be easy to conclude that we got it all wrong. Yet behind the scenes, blockchain technology continues to advance, making strides in finance and elsewhere. Central banks continue to explore ways of using the technology to issue digital currencies, and blockchain is making inroads in areas such as logistics. If anything, the past year demonstrated something we’ve always believed, namely that blockchain is not synonymous with cryptocurrencies—it is far bigger than that.
We also predicted that balanced portfolios, composed of stocks and bonds, would bounce back after a horrendous 2022. For a good chunk of last year, that didn’t pan out. Equities—led by the “Magnificent Seven”—raced ahead, while bonds slumped as yields rose. But in the final quarter of 2023, bonds came through, delivering a 4.1% return as yields on the 10-year US Treasury plunged nearly a percentage point. And for the year, stocks and bonds have finished in the black. We’ll count that as a win.
Our third surprise—the advent of a new-new normal—housed various themes. Some we aced, for example the steady fall of inflation in 2023. But our forecast for a recession, at least in the United States, was far off the mark. Labor shortages and unaffordable housing were themes we correctly anticipated. The last feature of the new-new normal—tepid productivity growth—remains too early to call. Productivity is inherently volatile from quarter-to-quarter, but the trends of recent years mostly confirm our thesis that, despite sparkling innovation, productivity is punk.
Our fourth 2023 candidate was that China would step up and address chronic imbalances in its economy and revive lackluster growth. While signs of a more pragmatic approach to policymaking are now emerging in Beijing, China has yet to grasp the enormity of the challenges to its economy posed by excess investment, over-indebtedness and slowing globalization. Recovery momentum on Chinese growth and economic development have slowed and are thus in need of renewal.
Our final theme for 2023 foresaw growing momentum behind alternative energy. Despite humanity’s continued reliance on fossil fuels, that theme was confirmed in 2023. The US Inflation Reduction Act has propelled forward the adoption of solar power and electric vehicles. But undoubtedly, the greatest energy transformation has occurred in Europe. In less than three years, Europe has weaned itself off of Russian oil and gas imports, an accomplishment no one could have predicted in 2020. That it did so while only suffering a mild recession, is, frankly, a staggering achievement.
What might surprise us in 2024?
Enough about this past year—what does 2024 and beyond herald? In what follows, we identify five themes worth watching in the year ahead.
Secular stagnation returns
As 2023 draws to a close, investors are rejoicing over the prospects of a “soft landing” for the economy, characterized by the return to low inflation without much risk of a recession.
But can the good times last? In our view, a key surprise for 2024 could be the return of “secular stagnation,” an outcome of stall-speed growth and low inflation, accompanied by the return to very low nominal interest rates, which characterized US and global growth from 2010–2020. Whispers of “Japanification” of the world economy could turn into shouting matches.
Here’s why:
The lagged effects of synchronous global monetary policy tightening, fading fiscal stimulus and the absence of decisive steps to boost growth in China could easily conspire to produce soft global demand in 2024. Recessions may end in Europe, but any recoveries will likely be weak. The US economy may skirt a formal negative gross domestic product (GDP) recession—or it may not, but growth is likely to slow.
Meanwhile, inflation will continue to fall, increasingly due to lower oil prices, softer rental rates and, outside the United States, currency appreciation against a fading US dollar.
Soggy growth and the return to central-bank desired rates of inflation could mean that interest-rate cuts are on the way. Next year, benchmark 10-year US Treasury yields may plunge to 3.0%, and short-term interest rates could end the year more than 1.5 percentage points below prevailing levels.
Here’s the concern. Weak growth might not be temporary. If households remain in deleveraging mode, as they have been for more than a decade, business investment spending remains tepid, as it has been, and governments begin to rein in large budget deficits, fantasies of soft landings could become nightmares of global demand deficiency. In macroeconomics terms, 2024 could then look like a year of back to the future—the return of secular stagnation.
Innovation moves to the next frontier: Space
Innovation is the hallmark of our times—so what is so “innovative” about highlighting innovation as a theme for 2024?
Yet we know it must be true. Advances in artificial intelligence (AI), alternative energy and biochemistry—to name but a few—are, if anything, accelerating.
Space is the next frontier. Zero gravity offers an excellent environment for chemical engineering and other forms of innovative manufacturing, particularly for the manufacture of chemical compounds used in new drugs. It is also a superior environment for producing silicon chips (i.e., with far fewer flaws). Boosted by commercial space launches (e.g., SpaceX), space manufacturing is poised to take off in 2024. It may even become the next fad in growth investing.
Our economies and our lives will continue to be changed by innovation, but not always for the better.
On the positive front, biomedical innovation should continue to save and enhance lives. Continuing a trend since the early 1990s, rates of death from cancer in the United States are declining across almost all cohorts by gender and race.1
AI holds out the promise of turning routine, dull and repetitive human tasks into those performed by machines. If so, that’s a wonderful workplace improvement, provided that those displaced can find more meaningful, productive and higher-paying work elsewhere. One does not have to be a Luddite to worry, however, that the transition for many will be difficult.
Saving the planet requires humankind to slow the emissions of greenhouse gases into the atmosphere and, eventually, to increase carbon capture. Scientific progress, through government support in the form of grants, is underway. Tax incentives and subsidies are hastening the transition. Those developments should continue, perhaps even at an accelerated pace, in 2024.
Productivity lags
Perhaps there is no greater mystery in economics today than the disconnect between innovation and productivity. To paraphrase the late Nobel prize-winning economist, Robert Solow, innovation is seen everywhere but in productivity statistics.
Several factors may account for why innovation does not necessarily lead to increased productivity.
First, much innovation in recent decades has been consumption-oriented, rather than production-oriented. Video streaming, smart phones and virtual reality are all examples of innovations that make it easier to entertain us. But they don’t boost output per hour worked.
Second, history suggests that some of the most productivity-enhancing innovations are those that vastly enhance communication and transportation speed, comfort and quality. The telegraph and telephones, autos and highways, computers and the internet, shortened distance and time, enabling humans to interact more closely and to build more efficient supply chains. Few of today’s innovations—from blockchain to AI—offer such networking gains.
Third, truly big innovations—the cotton gin, electricity, the internal combustion engine or the assembly line—massively transformed how we produce and distribute goods and services. Today it is difficult to identify innovations making comparable transformations anytime soon. AI has that potential, but right now its level of cognition, as judged by autonomous driving, fails to even reach high-school levels (i.e., the age at which humans learn to drive).
Finally, for all the advances in medicine, none as yet rival past innovations that most boosted life expectancy and the health of workers—the introduction of antibiotics, indoor plumbing or refrigerated food.
All too often, we live in animated wonder, dazzled by modernity. Until, that is, we reflect on what has truly mattered in the past. Productivity is probably more mundane than our fascination with modern innovation suggests.
Voter disenchantment prevails
Although not an obvious economic issue, elections are another theme we are paying attention to. About 40 countries comprising over half the world’s population will go to the polls in 2024, and the fiscal implications could be significant. While the adage that politics is local remains true, the common denominator for global households is disenchantment with the establishment.
Superficially, that seems odd, given that the global economy continues to grow, and inflation almost everywhere is coming down.
Yet frustration runs deeper. In economic terms, voters discount the recent past because of lifetime memories of disappointment. Living standards for many have stagnated. That is important because happiness is as much relative as it is absolute. When many Americans, Europeans, Asians or Latin Americans ask themselves, am I doing better than my parents or grandparents, or have I achieved as much as was expected of me or I expected of myself, their answer is apt to be “no.”
As data from the Pew Research Center point out, over the past 50 years, the share of GDP garnered by middle-income Americans has fallen from 62% to 43%. The corresponding share for the poorest Americans has fallen from 10% to 9%. Meanwhile, the share going to upper-income Americans has risen from 29% to 48%.2 That is the stuff of broad-based disenchantment.
Moreover, unfulfilled expectations are only part of the story. Breakneck innovation, above all in AI, is deeply unsettling to many. Workers fear for their jobs and, perhaps for their identities, as the 2023 writers’ and actors’ strikes so aptly demonstrated. Failed wars and the outbreak of new conflicts are also part of the prevailing American narrative. Gone are stories about the Greatest Generation of the 1940s and 1950s, along with its “anything is possible” spirit.
Those thinking that the end of the pandemic, the slaying of inflation and the avoidance of recession will lead to electoral victories for normality, orthodox policies and greater harmony in the electorate could be sorely disappointed with the outcomes in 2024.
Low-quality credit cracks
What goes up, must come down. In finance, as in physics, the laws of gravity have not been repealed.
In the 15 years since the global financial crisis (GFC), low interest rates and the easing of financial conditions have allowed an explosion of debt financing globally. In an environment of low interest rates, it has been a reasonable capital allocation decision for companies to take advantage of this low-cost source of funding.
But the ground is shifting. Low interest rates spurred borrowing demand at the lowest end of the credit-quality spectrum and the search for yield drew in investors, giving many creditors the wherewithal to expand. Since 2022, however, interest rates have risen rapidly in combination with a more challenging economic landscape.
So far, credit markets have held up, at least if we overlook the failures of US regional banks and Credit Suisse in the spring of 2023. But to say that the worst is over seems complacent to us. The maturity of borrowing was lengthened after the GFC. That extends lags between rising interest rates and credit stress, but it does not eliminate them. At some point, credits need to be renewed, and new borrowings financed, both at higher rates of interest.
It is almost impossible to know when or where cracks will emerge, but it seems reasonable to expect some to surface over the next 12 months. That’s because in addition to higher borrowing costs, many firms will also face weaker demand for their goods and services as the economy slows next year.
Most lenders counter that their portfolios of loans are well diversified. That may be true when viewed through the prism of size, sectors or geography. But economic downturns and higher interest rates create common, not idiosyncratic, shocks. They hurt small and large alike, travel coast-to-coast and around the world, and impact many sectors.
The coming year is therefore likely to herald a wake-up call. Default risk will likely be on the rise. While divisions between high- and low-quality debt might well be contained, we believe a watchful eye on any spillover effects across the corporate credit landscape is warranted in 2024.
As this is our final letter for 2023, we want to take this opportunity to wish all of our readers a joyous new year.
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1. Source: “Cancer Trends Progress Report: Mortality,” National Cancer Institute. August 2023.
2. Source: Horowitz, Juliana Menasce, Igielnik, Ruth and Kochhart, Rakesh. “Trends in income and wealth inequality.” Pew Research Center. January 9, 2020.
