Preview of 2024 - Trumped?

"Oh, no, my young Jedi. You will find that it is you who are mistaken, about a great many things" (Emperor Palpatine, Return of the Jedi)

2024 is of course mired in the impenetrable fog of stuff that hasn’t happened yet. We may think we can glimpse some shapes, perhaps informed by the calendar (US or UK elections say). This is likely an illusion. As we point out regularly, the most important items in investors’ 2024 in-trays will be the things that weren’t predicted. That is where market pricing will have most to grapple with.

Nonetheless, with this traditional bit of seasonal buzz-killing out the way, 2024 promises to be an interesting year for several reasons.

Elections

Yes, we are falling straight into the trap of assuming that the calendar can tell us anything interesting about the year ahead. However, US elections will be hard to ignore given both the choice likely facing the electorate, and the country’s standing as the world’s most influential economy. US capital markets provide the drum beat for the world’s investments.

There has never been a candidate like former President Trump. Much as in 2015, he appears to be expertly surfing a still raging culture war all the way to the White House. It will take many years to accurately analyse the effects of the hotel magnate’s previous time in office. However, among many other things, it was a reminder that populism can be perceptive, often locating the plight of the populace more effectively than mainstream politics. There was awareness of the so called ‘China shock’[1] and its deleterious effects on many US households[2] before President Trump. However, action was in short supply.

The Biden administration’s various legislative acts can be seen as part of the response. Proponents of unfettered trade are predictably outraged[3] by these attempts to ensure domestic production in certain strategically important areas. They are right that the return of industrial policy in the developed world may come at a price for consumers. However, it is a price that the current crop of policy makers, in the context of China’s state enabled rise, are seemingly happy to inflict. The hope is that it will be in exchange for some extra resilience to populist fever as rust belts are reinvigorated.[4]

All in all, the power of POTUS is considerable, but not unlimited. As President Trump’s first term in office indicated, there are restraints (both formal and informal) on executive power, particularly domestically. There are admittedly fewer constraints on international action, where various acts and statutes allow congress to be bypassed. However, even here we should be wary of translating campaign trail promises directly into implemented policy, particularly with such a famously mercurial candidate.

We can take some reassurance from the studies of the performance of the US economy and her capital markets under various political regimes.[5] The message here would appear to be partisan, in favour of the Democrats as better stewards of the economy. However, a deeper investigation reveals ‘events’, such as oil shocks, as a vital driver of differences. The point being that neither the US economy, nor the stock and bond markets that roughly reflect her outlook, are under the precise command of the President.

There are other elections to keep an eye on in 2024 too. The next UK general election could slip into 2025, but the build up to an expected changing of the guard – if the polls are to be believed - will certainly be next year. Meanwhile Taiwanese Presidential elections will be closely watched in the context of building tensions with China[6] as well several important elections in Europe.

Productivity pick up?

2023 finally provided some tangible signs of a much needed pick up in productivity growth. This engine of living standard improvements, investment returns and more besides has been curiously subdued in recent decades. Some make the link between less growth in the size of the pie and more popular anger as to how that pie is divided up.

So, its return would be important. What is to stop the green shoots appearing in the data proving transitory (word of the year for 2023)? Well, nothing of course. However, there are reasons why this time might be different.

The most important is the emergence, and rapid development, of generative AI. Whether a stochastic parrot[7] or something more general in terms of intelligence, this looks to be something that can wake the world up from its productivity slumber. There are other interesting factors to consider too.

Multiple incoming studies are pointing to a role for the state in productivity growth.[8] There are several important points here, first among them is the idea that private sector companies are generally too risk averse to take the necessary first steps in research and development. There is often too low a hit rate for shareholder-owned companies, incentivised by quarterly results, to play. Some of the most successful productivity growth periods in history have been fuelled by government funded, directed research, which has been followed up by commercialisation.[9]

Some will also point out that tight labour markets and more expensive workers are also helpful. One of the more famous attempts to explain the when and where of the first industrial revolution hinges on exactly this. Robert Allen argues that Britain’s high wages and easily accessible coal seams (relatively speaking) were central in encouraging entrepreneurs to substitute expensive labour for new machines.[10] With reference to today, we can certainly say that labour markets remain tight, wages are rising and some interesting new technology is emerging that might help augment workers.

While the cost of labour vs. technology can help explain the where and when, the why remains more hotly debated. However, one plausible explanation for why the first industrial revolution happened at all, centres on knowledge build up. A mountain of increasingly reliable knowledge of the world around us had been building in the centuries prior to industrial take off, with the scientific revolution crucial. Commercialising that knowledge, as with today, was made more difficult by the resilience of fake news, factoids, anti-science, and other knowledge cul-de-sacs.

Ultimately, we found a way, with knowledge access institutions such as the Royal Society, key to untangling all progress in knowledge creation and spinning it into something that would catapult living standards higher.

A decisive answer as to whether this time really is different… or not

2023 began with a rash of forecasts for a global recession. In the end, the world proved resilient to the monetary medicine (i.e. interest rate rises) dished out by very determined central bankers. It even withstood some of the related thrills and spills in sectors such as US regional banks.

As we look to 2024, many still expect a recession - The infamously long and variable lags between central bank decision and economic impact, simply grow longer and more variable. There is orthodoxy and empirical support here of course. Raising interest rates so sharply has almost always led to downturns in the economies in question in the decades post the second world war.

However, those arguing that this time is indeed different are growing in number with every day that passes without a downturn. This camp continues to argue that there is enough about the moment that is distinct from past interest rate cycles to make the outcome distinct too. From the early cycle strength of private sector balance sheets, to the new emerging technological paradigm and the very different spending posture of important governments, there is much that might blunt the messages of the past on interest rates.

Some of these factors will inevitably fade over the course of the year ahead. However, the fact that real wages are picking up in the areas with the highest propensity to spend in the US[11] and elsewhere, is likely important to bear in mind. The path of inflation is not easily forecastable of course, but there is a good chance that policy rates have reached a peak and may have scope to ease in the event of economic weakness.

Remember though, whether or not there is a recession in the year ahead should not be a question answered with all of your invested assets. Your answer, if indeed you have one, should be used to direct a fraction of your exposure.

Investment conclusion

It is probabilistic, not determinist, thinking that underpins our investment process. What that means is that we don’t spend our time trying to come up with point forecasts for what is going to happen in the year ahead and then bet the house on that single view. Our tactical asset allocation (i.e.: short-term), strategic asset allocation (i.e.: long-term) and fund selection processes are all intertwined and inherently planning for multiple potential futures and investing accordingly.

That may sound wishy washy or lacking in the muscular conviction so beloved of marketing departments. However, the time spent imagining multiple potential futures and handicapping their likelihood is key to creating robust long-term investment returns.

The other point to bear in mind here is that capturing the gains for the incoming industrial revolution cannot simply be a focused bet on technology stocks. Past industrial revolutions demonstrate again and again that the gains to these breakthroughs can be far flung in terms of sector and geography. Invest accordingly, is the mantra we adopt on your behalf.

We’re approaching the new year with a cautious optimism. There are undeniable challenges on the horizon for investors but there will also be opportunity. Brace for volatility but don’t bail out. Staying invested over the long term, even when there are short-term bumps, is what sets you up for a greater chance of success. Regular listeners to our weekly Word on the Street podcast will have heard this line before, and for good reason.

Find out about our ' Ready-made investments' via our Smart Investor platform. A selection of five Barclays funds that each aims to increase the value of your investments over time, using a broad mix of asset classes from across the globe.

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Learn about Barclays Wealth Management, the affluent and high net worth service provider for Barclays UK.

[1] https://news.mit.edu/2021/david-autor-china-shock-persists-1206

[2] https://blogs.lse.ac.uk/lsereviewofbooks/2021/08/12/book-review-deaths-of-despair-and-the-future-of-capitalism-by-anne-case-and-angus-deaton/

[3] https://www.piie.com/publications/piie-briefings/scoring-50-years-us-industrial-policy-1970-2020

[4] https://home.treasury.gov/news/featured-stories/unpacking-the-boom-in-us-construction-of-manufacturing-facilities

[5] Blinder, Alan S., and Mark W. Watson. 2016. "Presidents and the US Economy: An Econometric Exploration." American Economic Review, 106 (4): 1015-45.

[6] https://www.politico.eu/newsletter/china-watcher/taiwans-election-heats-up-as-do-beijings-warnings/

[7] https://braddelong.substack.com/p/perhaps-some-stochastic-parrots-are

[8] https://shapingwork.mit.edu/power-and-progress/

[9] https://marianamazzucato.com/books/the-entrepreneurial-state

[10] Allen, Robert C – (2009) – The British Industrial Revolution in a Global Perspective – Cambridge University Press?

[11] https://www.apricitas.io/p/are-real-wages-rising

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