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Happy New Year! It’s January, which means it’s time to offer predictions for what the new year may bring for global markets in 2024. But first, it’s important to reflect on what we learned over the previous year – and there was no shortage of lessons learned about markets, the economy, and central banks. So I’ll start by reviewing my five key takeaways from 2023, and then offer five things I expect to see in the year ahead.
1. Policymakers around the world are very sensitive to the potential that something could “break” as a result of the aggressive rate hikes we have experienced. They were proactive in addressing possible accidents, as we saw during the mini regional banking crisis in March 2023, and also the U.K. gilt crisis in September 2022. That should provide some comfort to investors going forward. I’m optimistic that policymakers will remain vigilant and quickly react to any issues that arise from the aggressive tightening that many central banks have engaged in, recognizing the long and variable lags of monetary policy.
2. Don’t believe what the Federal Reserve (Fed) tells you it’s going to do – believe what the data tells you the Fed is going to do. As I’ve discussed in recent months, many central bankers have maintained a hawkish public face even as substantial progress on disinflation continues. And so while the most recent “dot plot” indicates the Fed expects to cut rates by 75 basis points in 2024,1 I believe the Fed will likely cut between 100 and 150 basis points (of course depending on the data).
3. Monetary policy has had an outsized impact on markets. Rates mattered a lot last year. This is a hyper rate-sensitive environment given the intense tightening cycle many Western developed economies have experienced. A drop in long rates in the last months of 2023 has had a powerful impact on many different asset classes, from equities to fixed income to gold.
4. Don’t underestimate the power of psychology in impacting an economy. I expected a strong rebound for the Chinese economy last year given its post-pandemic re-opening, but I didn’t factor in the possibility that business and consumer sentiment would be tepid because of concerns about adequate stimulus. However, that also suggests that sentiment could quickly improve if businesses and consumers become more satisfied with policy going forward, and I expect that will be the case.
5. Diversification remains critical, in my view. Consider what we saw last year within some of the major asset classes:
Stocks. Chinese stocks disappointed due to the economic concerns I mentioned above, but overall, global equities gained more than 20% last year.2
Bonds. Global bonds experienced gains for the year, with European and US high yield bonds as the standouts.3
Commodities. Commodities posted losses, but gold was a juggernaut last year with demand helped by geopolitical risk buying, central bank purchases, and falling rates later in the year.4
In summary, and quite obviously, 2023 was a good year for markets – a balm for the wounds created by the annus horribilis that was 2022. If 2022 was captured in a country music song title, I believe it would be “How Can I Miss You If You Won’t Go Away?” But I definitely don’t feel the same way about this past year. If 2023 were captured in a country song title, I think it would be “If You Leave Me, Can I Come Too?”
In other words, 2023 was a good year, and I don’t think most of us would be eager to start 2024 if we thought the investing environment would change.
Now the first days of 2024 have unfortunately been more challenging. That is a reflection of anxiety and confusion around how much the Fed will cut rates this year. This has been fueled by some hawkish “Fedspeak” as well as some recent data.
But as Dallas Fed President Lorie Logan explained in a recent speech, “Restrictive financial conditions have played an important role in bringing demand into line with supply and keeping inflation expectations well-anchored. We can’t count on sustaining price stability if we don't maintain sufficiently restrictive financial conditions.”5 This helps to explain why we have been hearing hawkish talk.
While I think some concern and volatility will persist, I believe data over the next several months will provide greater clarity that the Fed will cut rates significantly this year, which should be supportive of equities and fixed income. In other words, I think the first half of 2024 will largely be a continuation of the last few months of 2023 albeit with more volatility.
1. I expect at least one election to have a surprise outcome. But as we’ve seen before, elections don’t matter for markets in the longer run, so I don’t believe it’s worth worrying about. (Read my colleague Brian Levitt’s analysis of U.S. presidential elections and stock market performance.)
2. I expect more hawkish Fed speak early in the year. This is how the Fed keeps a lid on easing financial conditions (see the quote from Laurie Logan above). However, it can send yields higher and stocks and other assets lower, so we need to recognize the potential for greater market turbulence.
3. I expect market breadth will continue to expand. In other words, I believe market performance will no longer be driven by just a small handful of stocks, as it was during 2023. I’m most excited about small-cap equities, as well as emerging markets equities and emerging markets bonds.
4. I believe the “fear of missing out” on market performance will accelerate in early 2024, leading cash-heavy investors to move into stocks and fixed income strategies. I expect diversification to increase as investors rebalance and increase exposure to underexposed areas.
5. The back half of the year is likely to be more tempered for equities; we could see some “give back” of gains from earlier in the year as markets worry about and discount 2025.
Kristina Hooper is Chief Global Market Strategist at Invesco.
Notes
1. Source: US Federal Reserve, as of Dec. 13, 2023.
2. Source: Bloomberg, as of Dec. 29, 2023, as measured by the MSCI ACWI price index. The MSCI All Country World Index is an unmanaged index considered representative of large- and mid-cap stocks across developed and emerging markets. Price indexes do not take into account dividends and cash payouts.
3. Source: Bloomberg, as of Dec. 29, 2023. European and US high yield bonds measured by the ICE Bank of America Euro High Yield Index and US High Yield Index. The ICE Bank of America Euro High Yield Index tracks the performance of euro-denominated, below investment grade corporate debt publicly issued in the euro domestic or eurobond markets. The US High Yield Index tracks the performance of US-dollar-denominated, below investment grade corporate debt publicly issued in the US domestic market. Global bonds measured by the ICE All Maturity Global Broad Market Index, which tracks the performance of US-dollar-denominated, below investment grade corporate debt publicly issued in the US domestic market.
4. Source: Bloomberg, as of Dec. 29, 2023. Commodities measured by the S&P GSCI Index. The S&P GSCI Index is an unmanaged world production-weighted index composed of the principal physical commodities that are the subject of active, liquid futures markets. Gold spot prices based on Bloomberg aggregated data.
5. Source: Federal Reserve Bank of Dallas, Jan. 6, 2024.
Disclaimer
© 2024 by Invesco Canada. Reprinted with permission.
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.
The opinions referenced above are those of the author as of Jan. 8, 2024. These comments should not be construed as recommendations, but as an illustration of broader themes. 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.
Forward-looking statements 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. Diversification does not guarantee a profit or eliminate the risk of loss. All investing involves risk, including the risk of loss.
Diversification does not guarantee a profit or eliminate the risk of loss.
All figures are in U.S. dollars.
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.
All investing involves risk, including the risk of loss.
Past performance is not a guarantee of future results.
In general, stock values fluctuate, sometimes widely, in response to activities specific to the company as well as general market, economic and political conditions.
Commissions, trailing commissions, management fees and expenses may all be associated with mutual fund investments. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Please read the simplified prospectus before investing. Copies are available from your advisor or from Invesco Canada Ltd.
Investment funds are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that any fund or security will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated. No guarantee of performance is made or implied. The foregoing is for general information purposes only. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.
Image: iStock.com/scyther5
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