“There’s been sort of two markets running this year,” says Pie Funds founder Mike Taylor. “You’ve had the mag seven, then you’ve had the rest of the market.”

The so-called magnificent seven top United States stocks - Microsoft, Apple, Nvidia, Amazon, Meta, Tesla, and Alphabet - collectively returned average growth of more than 90 per cent.

“So the Nasdaq really took off. The rest of the market sort of muddled through, although it’s had a little bit of a rally coming into Christmas.”

The local NZX50 finished the year more or less flat, whereas the Nasdaq was up 40 per cent, Taylor said.

Looking back at the Market Watch show’s picks for 2023, a predicted low for the stock market in the first half of the year proved accurate.

“The market sort of did make a low right after the Signature bank episode in March of this year and then hasn’t really looked back,” Taylor said.

It was a banking crisis that thankfully the US Federal Reserve managed to solve, he said.

Meanwhile, despite being sluggish and dipping into contraction in the third quarter we have technically avoided a recession - based on two successive quarters of contraction.

“I think the biggest prediction that we got wrong was that we expected the economy to be in recession this year and, you know, whether it’s New Zealand or the US, and it hasn’t actually materialised.”

The US in particular has surprised on the upside with inflation falling steadily but solid growth being maintained.

“We’ve had super strong migration numbers in New Zealand, the US has had a lot of fiscal stimulus and the consumers sort of just keep spending. So it’s been surprisingly resilient, I suppose.

The year ahead

“Covid was sort of like an an economic earthquake for investors and for markets and it’s just taken some time to work through the issues, like supply chain and normalise the economy.

“We’re mostly done, but there’s a couple of things still to normalise - one of them is interest rates and then the other one is fiscal spending.

“Now, it feels like both of those two will be set to normalise next year.”

Inflation really had proved transitory in the end, he said.

“We know from our own government that fiscal spending will be cut back, that’s going to be similar in other places around the world,” Taylor said.

“And I think with inflation back under control, we can expect to see finally lower interest rates that would be very heartening to many mortgage holders.”

Taylor doesn’t expect that New Zealand’s central bank will be the first to cut rates, but it would be unusual for it not to follow the rest of the world, he said.

“I would expect by the middle of the year, there’ll be a number of central banks cutting rates.”

That should help stimulate the economy in the second half of next year and create a good platform for the year afterwards, he said.

“So, unless our inflation is still sitting at 5 per cent, which I very much doubt, hopefully the RBNZ can be in a position to cut.”

If the central banks did hold out for longer because it wants to be extra sure that inflation was gone, that could yet see the economy enter recession, he said.

“Whereas I think if they were sort of cutting by the middle of the year, in an environment where you’ve already mentioned where inflation is under control, I don’t think that would be recessionary.”

Coming into 2024, that was creating a positive environment for equity markets, Taylor said.

“I would think there’s a good chance of the S&P 500 breaking through 5000 next year, making an all time high. There’s so much cash sitting in term deposit or money market accounts, it’s a record level in the US and that cash will look to find another home if interest rates come down again.”

While the big “mag seven” looked good for the year ahead, the companies sensitive to interest rates such as property stocks or infrastructure should also have a better year, Taylor said.

“And in general probably bonds will as well, if interest rates do fall and depending on the magnitude of the fall in rates, bonds could have a very good year.”

Meanwhile, the big tech stocks and the AI buzz had potential roll on for years yet, Taylor said.

“The hype might not be there. That was at the start of 2023. But I think the benefits that come from AI ... we’re only just getting started so there’s sort of a race to see how companies can actually monetise it.”

“The other thing about AI is that it probably will be deflationary, like many technologies. We could be in a situation in a year where the Fed’s trying to get inflation back up to 2 per cent. So it could be completely the opposite.”

“You know it may be that what we battled for the 10 years after the GFC is more of a norm. We could be back to where we were in 2019 with zero [per cent] rates.”