With the New Year comes updated insights to 2024. The following summarizes the key economic pointers that may affect investors this year.
“Setting the Stage:”
Financial markets start 2024 with a solid fundamental backdrop, including a persistent U.S. economic expansion and monetary policymakers who are inclined toward easing. Because of this fundamental backdrop, we believe much of the good news last year.
Economic and market factors to watch.
Overall, corporate and economic factors appear solid currently. With all of this in mind, the biggest changes are five market surprises summarized next.
- Inflation may not keep dropping.
Consumer price inflation slowed in 2023 to between 3%–4% (depending on the measure), and financial markets greeted this as a welcome turn toward disinflation. We don’t expect further steep declines. The Fed breaks down inflation components three ways: 40% – goods, 30% – housing services, and 30% non-housing services.
Why inflation could linger.
Factors that could cause inflation to persist in a tight labor market. Employment persists near all-time highs. Long-term demographic trends pointing towards an aging workforce have not changed materially since the end of the pandemic. The upshot is that there are reasons to believe the inflation rate will stay above the Fed’s 2% target.
- Fed rate cuts may not be as aggressive as expected or hoped for by investors.
The Federal Reserve signaled at its final 2023 meeting in December that its tightening cycle is over and rate cuts are on the way in 2024. Markets rejoiced in the immediate aftermath, as loosening financial conditions boosted optimism across most asset categories. However, the Fed may not be as aggressive as investors hope for.
Considerations for Fed rate cuts: Dealing with inflation is never an easy task for monetary policymakers, but it’s appearing possible that the Fed will nail it in 2024. With markets pricing in a high probability of a perfect scenario, the Fed could surprise the market.
- Will the expected soft landing occur?
We begin 2024, with the belief that inflation is defeated without a significant economic downturn, because the U.S. economy is proving resilient. Still, we are not complacent as there is still a risk being faced.
- Productivity issues.
Rising output tends to provide a magical elixir for boosting the economy and asset prices. Currently low productivity historically is followed by a surge of output – no guarantees of course. The latest economic data near the end of 2023 reflected a productivity recovery for the first time since the pandemic.
- A foundation for High-quality, U.S. large cap companies.
Large corporate companies may still be the strongest in the world. But they might finish lower on the asset-returns leaderboard because their relative valuations imply this is no surprise. The largest U.S. companies dominated by technology and communications giants—topped the global asset performance leaderboard in 2023. We’re not expecting the same level of outperformance in 2024, although there are solid fundamental reasons that large, high-quality companies have fared better in this higher interest-rate environment. (See the rising cost of capital and its investment implications).
Conclusion
Analysis suggests most large public companies should maintain strong interest coverage and, therefore, be able to navigate through a higher-rate environment. Yet valuations matter. Outsized stock returns for the largest U.S. corporations in 2023 implies there may be more potential for economic and corporate news in 2024 to provide positive surprises.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
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