2023 ended with a lot – Whether it was the mood-swinging inflation rates, or the global growth falling down, there’s a lot to learn. Though investment-grade bonds saw their best monthly returns in 30 years in 2023, the next year might be coming with financial swings that you’re not prepared for.
Lookout 2024: Here Comes a Financial Swing
This article will explore key trends and outlooks shaping the financial world in 2024.
Economic Growth: A Cautious Outlook
In 2024, economic growth is expected to slow down. The year is likely to see a modest expansion, with real GDP growth forecasted to be around 0.7%, compared to a better-than-expected growth of 2.8% in 2023. This slowdown is partly due to the effects of monetary policy and the fading of post-pandemic tailwinds.
Consumer spending and business investments are predicted to rise but at a more muted pace. Fiscal spending, which was a positive contributor in 2023, might turn into a modest drag on the economy. This cautious economic outlook for 2024 suggests that investors and businesses should prepare for a more subdued growth environment.
Monetary Policy and Inflation Trends
- Fed Funds Rate Stability: The Federal Reserve is expected to hold the Fed Funds rate at 5.25%-5.5% until mid-2024. This indicates a period of relative stability in the central bank’s approach to interest rates.
- Gradual Rate Cuts: Later in 2024, gradual rate cuts are anticipated, with the Fed Funds target range forecasted to decrease to 4.00%-4.25% by the end of the year. This shift suggests a move towards a more accommodative monetary policy.
- Inflation and Quantitative Tightening: Inflation, while showing signs of moderation, continues to influence monetary policy decisions. The Federal Reserve’s balance sheet reduction, also known as quantitative tightening, is set to continue at a pace of $95 billion per month throughout 2024.
Consumer Spending and Market Dynamics
Consumer spending growth may slow down due to factors such as diminished excess savings, plateauing wage gains, and restarting student loan payments. However, tight labour markets and healthy household balance sheets are expected to support overall positive consumer spending growth in 2024, albeit at a lower rate.
Global Economic and Equity Market Outlook
- Recession Risks: While avoiding a recession is now a common expectation, there’s still a high risk of a recession occurring in 2024. This uncertainty will challenge market participants throughout the year.
- Equity Market Performance: The equity markets, including the S&P 500, are facing a challenging year. Corporate margins may experience major headwinds due to a combination of factors, including a shift in inflation and market dynamics.
- Global Growth Slowdown: A slowdown in global growth is anticipated by the end of 2024. This slowdown will affect various economies, including the U.S., Europe, and the UK, partly due to cooling inflation and changing monetary policies.
Sectoral and Regional Perspectives
In 2024, sectoral and regional perspectives show varied outlooks. There is optimism for U.K. equities due to favourable sector compositions and valuation support. However, European equities may have a V-shaped path, ending the year relatively flat.
Japan remains attractive due to potential retail participation and a supportive policy backdrop. Emerging markets are expected to face challenges initially but could become more appealing as the year progresses, especially with demand for diversification away from the U.S. For China, better performance is possible if growth momentum is strong and geopolitical risks are contained.
This diverse regional and sectoral outlook suggests the importance of a well-researched and geographically diversified investment strategy for 2024.
Investment Strategies for 2024
- Fixed Income Focus: 2024 is predicted to be a good year for income investing, with bright spots in high-quality fixed income and government bonds in developed markets. Investors should consider these areas for potential opportunities.
- Cautious First Half, Stronger Second Half: The year is likely to be a “tale of two halves,” with a cautious approach advised for the first half, followed by stronger performance in the latter half. Central banks are expected to begin cutting rates in June 2024, improving the macroeconomic outlook.
- Technological Turbulence and Strategic Agility: With rapid advancements in technology, including generative AI and cloud transitions, financial services leaders must exhibit agility in 2024. The year will bring new challenges and strategic options that require quick and effective decision-making.
- Geopolitical Risks and Market Volatility: Geopolitical risks remain high, with ongoing conflicts and numerous national elections, including in the U.S. This situation is expected to contribute to higher equity market volatility in 2024.
The financial landscape in 2024 presents a complex mix of challenges and opportunities. Investors will need to be vigilant and adaptable, balancing risks with potential gains. Keeping an eye on the evolving economic indicators, monetary policies, and market dynamics will be crucial for making informed investment decisions in the year ahead.