What Do We Expect For Markets In 2024?

By Brian Levitt

Will inflation come under control before the economy deteriorates? When will central banks start cutting rates? Kristina Hooper, Chief Global Market Strategist, and Alessio de Longis, Head of Investments for Invesco Investment Solutions, joined the Greater Possibilities podcast to discuss Invesco’s 2024 Investment Outlook. We asked them the top questions investors have on their mind heading into the new year.

What can investors expect in 2024?

Kristina Hooper: It’s about the lagged effects of monetary policy at the end of the day. There’s much more to be seen in terms of the impact that rate hikes have had, both good and bad. So we’re likely, very likely, to continue to see significant disinflation, but it comes at a cost. So as we look ahead to 2024, we think of this as a balancing act, right? Will inflation get under control faster than the economy deteriorates? And that is the very significant balancing act. So hopefully, in a few months, consumers will feel better, because we’ll have made more progress on disinflation, but we won’t have had a very significant impact in terms of depressing economic growth.

What I would say is that this is an environment that is changing as we speak. Markets are processing the reality that the Fed has almost certainly stopped hiking rates. And that means there is a change in markets because they start to discount an economic recovery, so we’re already starting to see that.

Of course, in the early stages, there will be a lot of volatility because there is still some level of policy uncertainty. The Fed has not come out and said they’ve ended rate hikes, and in fact, we might get some hawkish language from the Fed trying to tamp down financial conditions. But in my opinion, this is the beginning of a recovery trade. And I think that’s important for investors to understand. I’m very excited about the coming months for markets and investors.

Alessio de Longis: We are in a cycle that is already somewhat extended and accelerated because of the policy response to COVID. For investors, this is not a (time to) close your eyes and forget your investment strategy. Investors need to reassess and evaluate how monetary policy is impacting the economy. We have a long way to go on that. And given the geopolitical risks that are real and alive, investors need to maintain basically a fluid approach to analyzing the situation. And if the facts change, be prepared to change their investment posture. I think from an investment standpoint, this is an environment where we believe investors are still compensated for adding cyclical risk in the portfolios, maintaining overweight exposures to things like credit or equities. This is an environment where compensation for risk-taking should still play out.

What about that much-anticipated US recession that was expected in 2023?

Alessio de Longis: Well, I think what happened is exactly the super important element that Kristina just highlighted, the balancing act between inflation and unemployment, right?Unemployment is at all-time lows. You don’t have a recession. Obviously, unemployment is a lagging indicator, but even the leading indicator of unemployment are suggesting, if anything, a moderate rise in unemployment that would be perfectly consistent with that Goldilocks scenario that Kristina has outlined — where inflation comes down faster than the unemployment rate rises, growth remains good enough, not too hot, which is exactly the perfect development for monetary policy.

Kristina Hooper: There is that significant alternate scenario, significant probability of an alternate scenario, in which we get more of a hard landing because rates are higher for longer, because of persistently high inflation. The other sub-scenario within a hard landing is that so much damage has been done to the economy, that it is sent into recession by the restrictive level of rates as they are now, which I think is a lower probability than that first scenario about a higher for longer. But again, I think our base cases are aligned in that it’s certainly not the highest probability scenario. The highest probability scenario is that that D-train, that disinflation train, continues and it’s significant.

Could the Federal Reserve lower interest rates in 2024?

Kristina Hooper: We anticipate that rate cuts would begin by the end of the first half of ’24. Now, this will be dictated very much by the data we see going forward, but from where we sit today, we think that’s very likely.

All we have to do is look at the December 2021 dot plot and the expectations for the Fed funds rate at the end of 2022 to know that. And so, clearly, markets have been going through this repricing process. I think, in particular, what we’ve seen is that recently with the CPI (Consumer Price Index) print for October, there is this great realization that, in fact, the July rate hike was the last one.

And that if we use that rule of thumb that it’s about eight, eight and a half months to the first rate cut, that’ll take us to the second quarter of ’24, and that we’ll probably see around a hundred basis points in cuts. But again, we just don’t know about the lagged effects of monetary policy. Maybe it’s even more than that in ’24.

Alessio de Longis: There is a non-negligible probability of a scenario where the inflation picture changes on a dime. And this, I’m fairly convinced of, central banks around the world have been so shocked by how wrong they were on inflation that they will be very reluctant to deliver any rate cuts when the optics of inflation are not supporting that decision. So not my base case, but I would say that’s more than a 20%-30% probability, which is not negligible.

If rates are cut, what could it mean for investors?

Kristina Hooper: Those rates will come down and investors will move their money. What we have seen is very mobile money over the last few years. They might as well have sneakers on them because they’ve moved. They’ve moved out of traditional bank accounts into high yielding accounts, and they are poised to move, in my opinion, in a significant way.

And they’re likely to follow the path of historical recovery traits. So that ultimately means a broadening of the market because it won’t just be the defensive, the large caps, the traditional areas where investors have focused recently, it’s going to be about the small caps, it’s going to be about the international, especially emerging markets.

How could the 2024 US election affect markets?

Kristina Hooper: I don’t think elections matter. Certainly, not in a material way over more than the very short term. Certainly, we can see short-term gyrations as a result, but I don’t think it really matters in the medium or longer term. Now, geopolitical issues, they can have a bigger impact, although again, very much in the shorter term, in my opinion. We always have to ask ourselves, is it contained or is it contagious?

We always have to ask ourselves, is it contained or is it contagious? And I think that’s a question you ask about any kind of crisis, whether it’s a financial crisis or a geopolitical crisis. But I tend to not let myself get concerned about geopolitical crises because we know the history, and what the history has told us is that it doesn’t matter to markets in any material way over the longer term.

Alessio de Longis: I agree with Kristina. We mentioned earlier, oil prices as being a real time barometer to determine when a regional problem becomes a global systemic problem. Oil prices is a very simple way to think about that transmission mechanism that affects everyone. But Kristina said something important earlier on monetary policy and recessions, which applies also here with geopolitics.

You don’t position a portfolio ahead of geopolitical risk, which is kind of like a lottery ticket in terms of probabilities, in terms of how rare and difficult to understand they are. But once a geopolitical risk hits, there is also often the right or wrong policy response. So again, we’re back to that template that Kristina described. Watch for that policy response. Watch for what policymakers will do to exacerbate or remedy to the problem. And yes, agreed, elections. We need to make a distinction. Politics don’t drive markets. Economic policies drive markets.

So once an election outcome is clear, going back to the drawing board and understanding what are the economic policies that come with that election outcome, now you can go back to a sound investment process and determine what the impact on the market is. So, you don’t position ahead of an election. But as investors, we need to understand once the election outcome is certain, what are the economic policy implications, if any, and have they changed?

And historically, what we find is that economic policies tend to impact more the relative performance between sectors because taxation and fiscal policies are often redistribution policies, say between industrials and materials or financials and energy. But economic policies rarely go and affect the predetermined direction of bond markets, equity markets, and around the growth cycle, as you, Brian, have always described with analyzing the historical analogies between different administrations.

Important information

The opinions expressed are those of the speakers, are based on current market conditions as of November 17, 2023, and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals. Invesco is not affiliated with any of the companies or individuals mentioned herein.

This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.

Should this contain any forward looking statements, understand they are not guarantees of future results. They involve risks, uncertainties, and assumptions. There can be no assurance that actual results will not differ materially from expectations.

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An investment cannot be made directly in an index.

Polls on the direction of the US economy are from the Associated Press-NORC Research Center and Gallup as of October 2023.

The United States Misery Index tracks the mood of the country by adding the unemployment rate to the inflation rate. The index was at 7.1% in November 2023, compared to the long-term average of 9.22% from January 1947 to November 2023. Data from Bloomberg.

Discussions about the US inflation rate are from the: US Bureau of Labor Statistics as of October 31, 2023. Based on the yearly percent change in the US Consumer Price Index, which tracks changes in consumer prices. In June 2022 inflation rose 9.1%. In October 2023 inflation rose 3.2%.

Data on the price of a dozen eggs is from the US Department of Agriculture as of November 14, 2023.

Statements about US unemployment are based on the U-3 Unemployment Rate, Total in Labor Force, Seasonally Adjusted, from the US Bureau of Labor Statistics as of October 31, 2023.

Statements about the markets pricing in lower policy rates are based on Fed Fund Futures data as of November 20, 2023, sourced from Bloomberg.

Fed funds futures are financial contracts that represent the market’s opinion of where the federal funds rate will be at a specified point in the future. The federal funds rate is the rate at which banks lend balances to each other overnight.

Statements about the dot plot based on data from the Federal Reserve.

The dot plot is a chart that the Federal Reserve uses to illustrate its outlook for the path of interest rates.

The discussion about the release of the Consumer Price Index and the one-day reaction of various asset classes is based on data from Bloomberg on November 14, 2023. On that day, the Russell 1000 Value Index returned 2.24%, the Russell 1000 Growth Index returned 1.95%, the S&P 500 Information Technology Index returned 1.92%, the S&P 500 Quality Index, returned 1.48%, the Russell 2000 Index returned 5.47%, the Russell Midcap Index returned 3.33%, the Russell 1000 Index returned 2.08%, the MSCI All Country World Index ex-US returned 1.74%, and the MSCI Emerging Markets Index returned 0.72%. Credit spreads fell from 125 basis points at the beginning of the week prior to the Consumer Price Index report to 114 at the end of the week that the Consumer Price Index was reported. Credit spreads represented by the Bloomberg US Corporate Bond Index option-adjusted spread.

The Consumer Price Index (‘CPI’) measures change in consumer prices as determined by the US Bureau of Labor Statistics. Core CPI excludes food and energy prices while headline CPI includes them.

The Russell 1000® Growth Index is an unmanaged index considered representative of large-cap growth stocks.

The Russell 1000® Value Index is an unmanaged index considered representative of large-cap value stocks.

The Russell 2000® Index is an unmanaged index considered representative of small-cap stocks.

The Russell Midcap® Index is an unmanaged index considered representative of mid-cap stocks.

The Russell 1000® Index is an unmanaged index considered representative of large-cap stocks.

These Russell indexes are trademarks/service marks of the Frank Russell Co.

The S&P 500 Information Technology Index includes stocks in the S&P 500 Index classified as information technology companies based on the Global Industry Classification Standard methodology.

The S&P 500® Quality Index screens holdings based on three fundamental measures of quality – profitability, earnings quality and financial robustness.

The MSCI All Country World ex USA Index is an unmanaged index considered representative of large- and mid-cap stocks across developed and emerging markets, excluding the US.

The MSCI Emerging Markets Index captures large- and mid-cap representation across 26 emerging markets countries.

The Bloomberg US Corporate Bond Index measures the investment grade, fixed-rate, taxable corporate bond market.

Option-adjusted spread is the yield spread which must be added to a benchmark yield curve to discount a security’s payments to match its market price, using a dynamic pricing model that accounts for embedded options.

Statements about the amount of money investors have in cash are sourced from the US Federal Reserve and Investment Company Institute as of October 31, 2023. Based on total amount in US bank deposits and money market strategies.

Statements about the level of short yields sources from Bloomberg as of November 20, 2023, based on the 3-month US Treasury rate.

Fixed-income investments are subject to credit risk of the issuer and the effects of changing interest rates. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. An issuer may be unable to meet interest and/or principal payments, thereby causing its instruments to decrease in value and lowering the issuer’s credit rating.

In general, stock values fluctuate, sometimes widely, in response to activities specific to the company as well as general market, economic and political conditions.

A value style of investing is subject to the risk that the valuations never improve or that the returns will trail other styles of investing or the overall stock markets.

Stocks of small and mid-sized companies tend to be more vulnerable to adverse developments, may be more volatile, and may be illiquid or restricted as to resale.

The risks of investing in securities of foreign issuers, including emerging market issuers, can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues.

Many products and services offered in technology-related industries are subject to rapid obsolescence, which may lower the value of the issuers.

Gross domestic product is a broad indicator of a region’s economic activity, measuring the monetary value of all the finished goods and services produced in that region over a specified period of time.

A basis point is one hundredth of a percentage point.

The yield curve plots interest rates, at a set point in time, of bonds having equal credit quality but differing maturity dates to project future interest rate changes and economic activity. The front end of the yield curve refers to bonds with shorter maturity dates. An inverted yield curve is one in which shorter-term bonds have a higher yield than longer-term bonds of the same credit quality. In a normal yield curve, longer-term bonds have a higher yield. A steepening yield curve means that the difference between short term and long term is increasing.

Credit spread is the difference in yield between bonds of similar maturity but with different credit quality.

GFC stands for global financial crisis.

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Original Post: What do we expect for markets in 2024? by Invesco US

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