Published on January 9, 2024
Rounding Up the 2024 Market Outlooks
If we rewind the clock to one year ago, many investors entered the year expecting soft equity markets and forecasting credit problems due to interest rates that were higher than what many investors considered sustainable. In 2024, even Goldman Sachs, which had a more positive than consensus outlook in 2023, reflects, “The global economy has outperformed even our optimistic expectations in 2023.” 1 Considering the stress on financial markets caused by the collapse of SVB and interest rate hikes in the first part of the year, it is quite surprising that equity markets remained resilient throughout the year. We introduce this Insight with the context that forecasting in the short term can be a challenging and, at times, foolish exercise, but hopefully collecting some of the key points from the annual outlooks of established institutions can provide helpful information on where markets are right now and what large market participants believe might happen in 2024.
The Big Picture
Overall, no major financial institution is forecasting dramatic changes to asset markets or the global economy. JP Morgan Asset Management, for example, is on the more bearish side, but they are only calling for a slight recession as their base case, specifically stating that “developed market economies could slip into mild recessions” and “weaker growth helps to push inflation back towards central bank targets.” 2 Similarly, investment research firm BCA Research believes that "a recession in the US and Euro area was delayed this year but not avoided. Developed markets (DM) remain on a recessionary path unless monetary policy eases very significantly.” 3
On the other hand, firms like Goldman Sachs Asset Management have a relatively more bullish outlook. They write, “We continue to see only limited recession risk and reaffirm our 15% US recession probability. We expect several tailwinds to global growth in 2024, including strong real household income growth, a smaller drag from monetary and fiscal tightening, a recovery in manufacturing activity, and an increased willingness of central banks to deliver interest rate cuts if growth slows.” 1
More in line with Goldman Sachs is the institutional asset manager, Capital Group. Their economist Jared Franz remarks, “The resilience of the U.S. economy, in particular, really has been remarkable when you consider how much consumer prices have gone up and how aggressively the Federal Reserve has raised interest rates.” He believes that there is still a risk of a possible recession, but that the “risk has declined substantially.” 4
U.S. recession debate produces scattered 2024 forecasts
Rates and Credit
With respect to Interest Rates, more consensus exists. JP Morgan and Goldman Sachs believe that we will likely see interest rate cuts during the back half of 2024. Specifically, Goldman writes, “Most major DM central banks are likely finished hiking, but under our baseline forecast for a strong global economy, rate cuts probably won’t arrive until 2024 H2. When rates ultimately do settle, we expect central banks to leave the fed funds rate above their current estimates of long-run sustainable levels.”1 JP Morgan caveats that analysis, saying, “If economies remain resilient, and inflation is not showing signs of returning to 2%, then the rate cuts that are currently priced in will have to be removed.”2
Overall, most outlooks we reviewed tell a similar story: Interest rates should revert to the “old normal,” that is, the 10-year treasury rate between 3-5%. Capital Group summarized this view, saying, “Treasury yields may remain at levels considered normal prior to the global financial crisis and hover in a range of 3.5% to 5.5%. Call it the ‘old normal.’ Going all the way back to 1870 — or roughly 61% of the time — rates have stayed mostly in the range of 3.0% to 6.0%.”
Moving to Credit, most forecasts encourage investors to remain very selective and not take on too much spread risk.2 Blackrock for example, has referenced the higher interest rates and therefore higher cost of capital increasing the overall refinancing risk within credit markets. That is, when previously issued debt is refinanced it will likely be refinanced at higher rates. Blackrock expects that this refinancing risk “will generally be a catalyst for performance dispersion in the corporate credit market.”5 Throughout 2023, many managers expected to see a larger credit event. Still, moving into 2024, it seems that many large financial institutions believe that credit challenges will continue to be idiosyncratic and contained.
Short- and Long-Term Yields
Federal Reserve Bank of St. Louis Economic Database. Data as of Oct. 17, 2023.
Like credit markets, many outlooks and forecasts are calling for selectivity in Equity Markets. JP Morgan asset management states, “Our highest conviction view across equity markets is a focus on higher quality stocks – those with robust balance sheets, proven management teams, and a stronger ability to defend margins. Naturally, some of these will be found in the technology sector, but there are also good examples in more cyclical sectors such as industrials and financials, as well as more traditionally defensive sectors such as healthcare.”2 Similarly, Morgan Stanley believes that there will be more dispersion and that the stock market will be defined by an overall muted upside but supportive of a stock-picking environment. They think that there will be “a richer opportunity set under the surface.”6 Société Generale echoes this overall sentiment; they believe that overall volatility will increase and that there will be opportunities for investors to remain valuation sensitive and “buy the dip.”7
Many of the outlooks reviewed for this Insight discussed a potential increase in allocation to Alternatives. For example, JP Morgan said they “see an increased role in portfolios for real assets, such as private infrastructure and timber. These asset classes historically have exhibited a low correlation to traditional assets, as 2022 demonstrated, and thus can often diversify against the inflation shocks that lead to periods of positive stock/bond correlation.”2 Similarly, Blackrock spent a large portion of their 2024 outlook discussing the great opportunity within private debt. They believe that “investors will continue to increase their allocations to private debt” and that “private debt has cemented its status as a sizable and scalable asset class for a wide range of long-term investors.”5
On the Hedge Fund side, institutional asset consultant Cambridge Associates believes that we are entering an above-average environment for equity long/short managers due to the “considerable rise in short rebates, that is the interest earned on the proceeds of a short sale, and economic conditions within major geographic regions.”8
Time will tell what opportunities and challenges will present themselves in 2024. While these outlooks are often instructive, there remain constants in financial markets and investing. Diversification and long-term thinking often lead to positive outcomes. We here at Crystal Capital Partners will continue to work hard to provide you with the tools and managers to provide you opportunities for diversification and alpha over the long term.
- Global Economics Analyst Macro Outlook 2024 The Hard Part Is Over (goldmansachs.com)
- JPM AM Market Insights (jpmorgan.com)
- Stock Market Outlook: S&P 500 Could Crash 27% As US Tips Into Recession (businessinsider.com)
- Economic outlook: A mixed picture for global growth in 2024 | Capital Group
- PowerPoint Presentation (blackrock.com)
- Stock Market Outlook 2024: Expect 'Richer Opportunity' Under the Surface (businessinsider.com)
- S&P 500 to Approach Record High, Then Plunge As Recession Hits: SocGen (businessinsider.com)
- 2024 Outlook: Hedge Funds - Cambridge Associates