For wealth-builders, a (thankfully) better year than it might have been

2023 concept with upwards-facing arrows overlaid on a hand with one finger raised, pointing up

For those of us who lived through them, as economically-active adults, 2008 and 2009 are difficult to forget. The deepest recession in 60+ years, a global financial crisis, banks collapsing — it was, as that old Chinese saying goes, an “interesting time”.

Ditto 2020 and 2021, of course. Few of us, I suspect, thought that we’d ever live through a global pandemic, and see the UK economy put into repeated lockdowns.

And ditto 1987. Black Monday, in October 1987, saw the FTSE 100 fall 23% in two days, and 36% in a month. Or 1992, when the UK fell out of the European Exchange Rate Mechanism, and interest rates rocketed from 10% to 12% and then (briefly) to 15% — all in a single day. Which happened to be my birthday, at a time when my wife and I had the largest mortgage we’d ever had in our young lives.

Or even 1967, when the government devalued the pound, and prime minister Harold Wilson went on television to address the nation, and promise that the pound in our pockets wouldn’t be devalued. Even at 13, I didn’t see how that was possible. (It wasn’t.)

Painful, but thankfully boring

But what of 2023?

When the history books are written, I think that there will be two takes on 2023.

The first is the big macro picture, which — relatively speaking, compared to the years I’ve just been talking about — was something of a non-event. No global crises, crashes, collapses, or other financial phenomena. No new global pandemic, no new major armed conflicts (ignoring Gaza, which perhaps I shouldn’t), and we didn’t have a prime minister who crashed the economy.

Boring, really. But very welcome after 2020, 2021, and 2022.

The second picture is the personal take on 2023, where the view is less sanguine. As individuals, we’ve all been somewhat under the cosh, battling high inflation and high interest rates in a low-growth economy.

And the pain is set to get worse, I suspect, as increasing numbers of people come off the ultra-low fixed mortgage interest rates prevailing since 2009, and move onto the higher mortgage interest rates we’re seeing now. Mortgage brokers report falling rates, to be sure — but they’re still way higher than the rates that have been typical for the last decade or so.

Taxes, too, are taking a bigger chunk of people’s incomes, not least due to ‘fiscal drag’, where wages rise faster than tax bands, dragging more people into higher-rate bands. It doesn’t help, either, that dividend tax allowances and capital gains tax allowances are shrinking, too.

Modestly favourable markets

The Footsie rose modestly during the year, climbing from 7,452 on January 3rd to 7,698 on the Friday before Christmas, as I write these words. The year’s high point, though, was late February, when the market reached 8,014. Despite flirting with 7,900 a couple of months later, those highs were never recaptured.

What of fixed-interest instruments? Well, in a high-inflation, high-interest rate environment, bonds and gilts (as I’ve written before) not surprisingly performed poorly — but as we’re primarily equity investors here, that will have troubled relatively few of us.

(At least, troubled us directly: it certainly hasn’t been a good year for so-called ‘lifestyled’ pensions, which swap equities for bonds and gilts as savers get older and close to retirement: I’ve seen reports of would-be retirees’ pensions shrinking in value by 30% or more.)

The pound rose modestly against both the euro and the dollar, too, making it cheaper for us to buy overseas assets – more on which, soon.

In short, as years go, 2023 was probably as reasonable a year as we could expect.

Looking ahead

What of 2024?

Detailed predictions would be foolish: no one knows how the markets will move over the next twelve months, or what events will shape those moves.

But the broad macro picture, I think, is clearer.

Inflation, currently at 3.9%, will continue to fall: the economic pain we’re experiencing is constraining demand. In turn, interest rates will also fall, and sooner than the pundits were expecting even a few weeks ago. My guess: the Bank of England’s predictions of a ‘higher for longer’ interest rate environment will prove no more reliable than any of its other predictions.

With interest rates falling, stock markets will rise. Some sectors will bounce back more strongly than others: REITs, battered by higher interest rates, should certainly benefit. Will the Footsie pass 8,000 again? The odds are reasonable, I think.

Earlier, I mentioned the rising pound. Sterling’s nadir was in September 2022, as Liz Truss’s growth and taxation policies frightened the markets: the pound fell to $1.08 — significantly below today’s $1.27.

But sterling was at $1.42 as recently as May 2021, so there’s still some way to go. My guess is that 2024 will see sterling above $1.30, and possibly above $1.35. If you’ve got your eye on some decent-looking American shares, 2024 could be the year that the market moves in your favour.

Happy New Year! 

So here’s to 2024, and our collective wealth-building endeavours. A happy — and prosperous — New Year to you all.

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