Market Outlook 2024: Crisis Averted?

Uncertainty persists, and yet the mood music entering 2024 is the opposite of the “Jaws” soundtrack accompanying the start of this year.

With many calling the end of interest rate hikes and only a mild recession on the cards, the question becomes whether markets are pricing in too much smooth sailing.

The possibility of the soft-landing base case being wrong remains. Only a year ago, we had bleak prognoses for U.S. equities, hopes of a Chinese economic recovery, whispers of strong fixed-income returns and the “most forecasted recession ever”—and none of these have yet materialized.

In fact, global multi-asset portfolios have already recouped more than half of their losses from November 2021 to October 2022 and the MSCI World booked its eleventh best month since 1969 this November.

Yet, the 2024 horizon is littered with unknowns and these as well as unknown unknowns will be the key risks to the triumphant confidence boost of recent months.

Aside from potential inflation surprises and geopolitical escalation, investors will have to contend with geographical dispersion in economic output and monetary policy, as well as 2.5 billion people representing $44 trillion in gross domestic product going to the polls next year across the U.S., U.K., India, Russia, Mexico and Taiwan. 

Asset managers have attempted to wrangle some of the key questions of the coming year and ETF Stream has collated a handful of these views.

BlackRock: Fed Is Likely Done Hiking

Whether, where and when interest rates will be cut by central banks is unsurprisingly the burning question of 2024 and the answer will define outcomes for economies and portfolios alike.

After haphazard stimulus and then the fastest pace of rate hikes since the 1980s in the U.S., forecasts on the Federal Reserve’s policy pathway have since settled to one or no more hikes, and yet the game of picking when cuts will begin remains more treacherous.

Between its BlackRock Investment Institute and iShares 2024 outlooks, BlackRock argues “the Fed is likely done hiking” but warns “the market overestimates the speed and scope of Fed easing in 2024”.

The world’s largest asset manager said it doesn't see a pivot by Federal Reserve Chairman Jerome Powell’s team until the second half of 2024, with the focus shifting from ‘how high’ to ‘how long’ policy rates remain high.

This view was echoed in Vanguard Group’s 2024 outlook, with the Pennsylvania-based investment giant looking for further inflation decline led by weakened labor demand and slower wage growth, for central banks to start cutting policy rates in the second half of next year.

It added it expects rates “to settle at a higher level compared with after the financial crisis and during the COVID-19 pandemic”, representing a “structural shift” and “the single most important financial development since the GFC (great financial crisis)."

Deutsche Bank Expects 175 Basis Points of Rate Cuts in 2024

Elsewhere, Deutsche Bank analysts stood by their macro narrative that we are coming toward the cutting edge of a policy-led boom-bust cycle and "lags of policy"—“which are highly uncertain in their timing and impact”—will likely trigger a “mild U.S. recession in H1 2024," prompting a reduction in the growth outlook and the Fed responding with 175 basis points of rate cuts from current levels.

In Europe, Deutsche Bank has a core inflation forecast at 2.1% in 2025, which they said will make the European Central Bank “relatively cautious in cutting rates”, with the firm anticipating the first ECB cut in June, with a total of 100 basis points in 2024 and 100 basis points in 2025.

On the inflation outlook, JPMorgan noted core price inflation has “collapsed from its peak of over 9%” and will approach central banks’ mandate rates in the U.S. and Europe by the end of 2024; however, the bank called for structurally higher inflation between 2% and 2.5% over the next five to 10 years. 

Citi concluded that it expects the fed-funds rate to fall to a “longer run” normal of 2.5% over “the next few years."