Every January, it’s customary to look back on the year that was. What were the highlights? What were the “lowlights”? What events will we remember? Most importantly, what did we learn?
As you know, many noteworthy and historic events happened in 2023. Conflicts in Gaza, Ukraine, and Sudan; India surpassed China as the most populous country in the world; New temperature records were set all around the globe; The use of “artificial intelligence” exploded and turned multiple industries on their heads; Chinese spy balloons and deep-sea submarines grabbed the headlines; and the “Barbenheimer” phenomenon reinvigorated Hollywood.
But in some ways, one of the most notable occurrences of 2023 is what didn’t happen: We never entered a recession.
Inflation, Interest Rates, and Jobs. When 2023 began, the fear of a recession was so widespread that it almost seemed inevitable. According to one survey, 70% of economists expected a recession to hit the U.S. in 20231. Most economists also predicted a recession here in Canada2. For politicians, pundits, and analysts, it was practically all they could talk about.
But it never quite happened. Indeed, the U.S. economy grew by 2.2% in the first quarter, 2.1% in the second, and 4.9% in the third3. Canada’s economy, unfortunately, didn’t quite reach these heights. Our GDP rose by 0.6% in Q1, 0.3% in Q2, and then slid by 0.3% in Q34. Tepid results, to be sure, but still, not a recession.
Now, let’s be fair to all those economists who got it wrong. They had very good reasons for expecting a recession. Reasons based on data, logic, and history.
You see, when the year began, the U.S. was coming off a nasty 2022. While consumer prices were already coming down from their earlier highs, the national inflation rate was still 6.5%5 . Interest rates, meanwhile, had risen dramatically, from just above 0% at the beginning of 2022 to over 4% by the end6. It was already the highest level they’d seen in fifteen years – just before the Great Recession in fact – and every indication was that rates would continue to rise higher. All this economic pain was reflected in the stock market. The S&P 500, for example, dropped over 19% in 2022.7
We Canadians were dealing with sky high consumer prices at the beginning of the year. Our nation’s inflation rate was 5.9%8. Because of this, Canadians were also contending with higher interest rates. To combat inflation, the Bank of Canada (BoC) had hiked rates to over 4% by the beginning of 2023 and would raise them still further as the year went on. (As of this writing, interest rates are currently at 5%.)9
So, here’s how economists saw things. Higher rates often lead to lower consumer spending. Lower spending, in turn, prompts businesses to decrease the cost of the goods and services they provide. Essentially, higher rates create an environment where supply is greater than demand, thus cooling inflation.
But there’s a side effect to this. If spending drops too much, businesses are often forced to cut back on expansion, investment, and ultimately labor costs. This leads to a rise in unemployment and a contracting economy. In short, a recession.
This string of events isn’t just logical. It’s supported by history. When inflation has skyrocketed in the past, the U.S. Fed’s playbook has usually worked to bring prices down…but it’s usually triggered a recession, too. Economists call this a “hard landing.”
Take a look at the following chart. It shows U.S. interest rate levels since 1955. Within the chart are grey vertical bars which indicate U.S. recessions. Notice how often the grey bars appear in the aftermath of a sharp rise in rates?
Similarly, the following chart shows the U.S. unemployment rate. See how the same grey bars always coincide with a major spike in unemployment?
It’s clear that historically, fast-rising rates often trigger a rise in unemployment, which contributes to a recession. What about when prices come down, but the economy does not? Economists call that a soft landing, and it’s proven to be very difficult to achieve. It’s no surprise, then, that most economists predicted a hard landing in 2023.
One year later, that hasn’t happened. Interest rates in the U.S. did continue to rise. As of this writing, U.S. rates are at 5.3%. Inflation has continued to cool, albeit slowly. As of November, the U.S. inflation rate was 3.1%. That’s a 3.4% drop from the beginning of the year. But consumer spending has remained steady. And the labor market has remained strong. The U.S. unemployment rate was only 3.7% as of November10. And, as we’ve already covered, the economy has continued to grow.
For Canada, things were somewhat different. By end of November, the Consumer Price Index showed an inflation rate of 3.1%. That’s still higher than where the BoC would like it to be, but it’s much lower than before. (The Bank usually aims for a 2% annual rate of inflation.)
Higher rates have also slowed down consumer spending, but not quite to the extent that economists feared. While Canadian unemployment has ticked up slightly – from 5% in January 2023 to 5.8% by the end of November11– the labor market has remained steady enough to keep the economy from sliding into a recession; at least for now.
Let’s pivot away from the economy for a moment and look at another major storyline of 2023: The rise of artificial intelligence.
The Rise of AI. By now, I’m sure you’ve heard all about – and possibly even used – ChatGPT and other AI tools. The ability to generate text, images, research, and even computer code at the push of a button has driven numerous tech companies into a frenzy, each looking to bring newer and better AI tools to the market. Some of the biggest publicly traded companies have caught the bug, from Google to Microsoft, from Meta to Tesla. This euphoria for new technology spread to investors early in the year, driving tech stocks higher and higher. That’s why the NASDAQ index, which is heavily weighted toward technology companies, performed so well in 2023.
Looking Ahead. Moving forward, investors will be watching closely to see if our economy can once again avoid a recession or not. They’ll also be keeping a close eye on interest rates. Because lower rates free up more funds for consumers to spend and businesses to expand, they tend to have a positive impact on the stock market. While many analysts have predicted a rate cut in the spring, inflation probably needs to drop a little more for that to happen. The Consumer Price Index, which measures the average change in the price of goods and services over time, was mostly flat in the fourth quarter. And, if you take out food and energy prices, which are notoriously volatile, inflation has actually gone up since September.
The housing market will also play a role in this. As you undoubtedly know, housing prices in Canada are…expensive, to say the least. But many homeowners haven’t even felt the impact of higher interest rates yet. According to the Canada Mortgage and Housing Corporation, some 2.2 million Canadian households will be subject to higher rates over the next two years12. That would be like adding jet fuel to a housing market that’s already on fire. But some economists think this will make the Bank of Canada even more likely to lower interest rates, and sooner rather than later.
So, that’s the story of 2023. But, when looking back on last year, it’s important not to just recap events. We also need to determine what we can learn from them. Here are a few lessons I think are worth remembering in 2024.
#1: Always emphasize preparation over prediction.
The economists who predicted a recession weren’t stupid. They used the best data they had to make the best predictions they could. But 2023 shows that even the most well-informed people simply can’t see the future. Even the near future! There are simply too many variables to consider. That’s why we always emphasize planning (and reacting) over predicting. We can’t predict when the markets will drop, as they did in 2022. Or, when they’ll rise, as they did in 2023.
What we do at WealthLife Capital is plan ahead for what each of our clients should do if the markets fall, or if they rise. We help our clients prepare mentally and financially for both market storms and market sunshine. So that they can weather the former and take advantage of the latter.
When investors predict, they’re essentially swinging for the fences on every pitch. Occasionally, a prediction can lead to a home run…but it can also lead to a lot of strike outs. By planning, we don’t have to swing at all. Since we can’t control the situation, we simply make the best out of every situation. We control only what we can control – ourselves.
#2: Be wary of confirmation bias.
Earlier in the year, I spoke to many people who were convinced a recession would happen. Because of that, they tended to disregard all data that pointed away from a recession, and only valued information that confirmed what they already believed. As a result, many investors missed out on a stellar market recovery. This is another example of why preparing is much better than predicting. It removes emotion from decision- making. At WealthLife Capital, we’re not so focused on “being right” as we are on “being ready.”
#3: Remember that past performance is no guarantee of future results.
You’ve probably seen this line in the past, and 2023 is a great example of why. Just because rising interest rates have led to recessions in the past doesn’t mean they always will. Just because the markets went one direction yesterday doesn’t mean they’ll go the same direction tomorrow. While history is a great resource to draw from when making decisions, it’s just a guide, not a guarantee.
#4: At the same time, don’t anchor to the present.
As humans, we have a natural tendency to think that the way things are today is how they’ll be tomorrow. When 2022 ended, many investors felt that 2023 would be much the same. Now, we run the risk of thinking that just because a recession didn’t happen last year, it won’t happen this year. Again, it all goes back to planning and preparation.
Here at WealthLife Capital, we will continue to prepare for all possible outcomes. We’ll help our clients plan for how to reach the outcomes they want and avoid the ones they don’t. Instead of predicting, instead of assuming, instead of anchoring, we will accept that the future is written in clay, not stone. Only when it becomes the past does it harden. By doing this, we can help shape your future into whatever it is you want it to be.
So, that’s 2023! I hope it was a wonderful year. If you ever need any help making 2024 even better, know that we are always here. In the meantime, my team and I wish you a Happy New Year!
Sources:
1"Top US economists are often wrong – should we trust their predictions?” The Guardian, www.theguardian.com/business/2023/nov/19/useconomists-wrong-predictions
2“If you thought 2022 was bad…” CBC, https://www.cbc.ca/news/business/2023-economic-forecast-1.6695497
3“Annualized growth of real GDP in the United States,” Statista, www.statista.com/statistics/188185/percent-change-from-preceding-period-inreal-gdp-in-the-s/
4“Canada GDP Growth Rate,” Trading Economics, https://tradingeconomics.com/canada/gdp-growth
5“United States Inflation Rate,” Trading Economics, https://tradingeconomics.com/united-states/inflation-cpi
6“Federal Funds Effective Rate,” St. Louis Fed, https://fred.stlouisfed.org/series/FEDFUNDS
7“S&P 500 Historical Annual Returns,” Macrotrends, https://www.macrotrends.net/2526/sp-500-historical-annual-returns
8“12-month change in the Consumer Price Index,” Statistics Canada, https://www150.statcan.gc.ca/n1/daily-quotidien/231219/cg-a001-eng.htm
9 “Canada Interest Rate,” Trading Economics, https://tradingeconomics.com/canada/interest-rate
10“Unemployment Rate,” St. Louis Fed, https://fred.stlouisfed.org/series/UNRATE
11“Unemployment rate unchanged in December,” Statistics Canada, https://www150.statcan.gc.ca/n1/daily-quotidien/240105/cg-a002-eng.htm
12“What does 2024 have in store for the Canadian economy?” CBC, https://www.cbc.ca/news/business/armstrong-inflation-economy-1.7066473
