Consumer health will dominate headlines in 2024 as the eventual recession becomes a reality. The onset of a recession is a lagging indicator and represents a normalized shift in the business cycle, one that has occurred every 6.5 years since WWII (on average). We are emphasizing a soft landing, which indicates slowing growth, not a contraction. This can be supported by a fiscally sound consumer (relative to previous cycles) and an economic backdrop that has already exhibited a recession in various key economic sectors, mainly in housing and manufacturing. We also remain convicted of impending benefits tied to the end of the Federal Reserve’s tightening cycle.
The disinflationary trend of 2023 is likely to remain intact in 2024. The restrictive actions of the Federal Reserve carry a notable lag, most of which will be observed throughout the year and may further sustain downside pressure on inflation. The trend is likely to cement the end of the Fed’s interest rate tightening cycle, a concept that may also be substantiated by the cooling labor market.
The relationship between the U.S. dollar and the Japanese yen has presented opportunities not seen in the past two decades. Such currency dislocations, among others, are allowing us to remain opportunistic on non-U.S. allocations by not solely relying on local economic and consumer factors for decision making.
Global equity markets are likely to experience downside volatility in the first half of the year, followed by a more normalized second half. Attempting to time the transition remains risky and ill advised. The eventual recession will create a weak sentiment backdrop that may pave the way for a non-concentrated market reversal. We are entering 2024 with a hedge on our equity market participation and remain convicted of active management benefits throughout the cycle. We are focused on capturing global opportunities throughout the year, as the interest rate neutrality has granted an advantage to bottom-up fundamental analysis.
The artificial intelligence (AI) wave is not likely to subside in 2024. We urge caution in deciphering it as a unique concentrated investment option, and we note that the impact on economic productivity is likely to be high yet have a similar effect to other innovations (i.e., internet, computers, etc.).
The fiscal policy backdrop in 2024 will gain tremendous media coverage as part of the presidential election cycle. The impact on capital markets, however, is likely to remain muted. As the incumbent political party seeks reelection, fiscal proposals tend to be less impactful to current economic activity. We are likely to see increased coverage on debt ceiling discussions and monetary policy perspectives, all of which may create uncertainty.
Risk & Uncertainty
The labor market has been the most resilient economic beacon of the past three years, yet the momentum is appropriately losing steam. The lagged effect of the Federal Reserve’s interest rate tightening cycle, which commenced in early 2022, is likely to cause an increase in jobless claims, bring labor demand to its long-term trend, and bring wage growth back to its normalized pre-COVID trend. We believe this is an appropriate shift to sustain the intact disinflationary cycle of 2023. As this unfolds, however, the short-term sentiment backdrop may be one of added economic risk and increased volatility across global capital markets. We believe this to be a short-lived reaction.
The geopolitical landscape in 2024 will be one of sustained conflicts in Russia, Ukraine, Israel, and potentially Taiwan. The U.S. presidential election cycle may add uncertainty to the tensions based on foreign policy perspectives from the presidential hopefuls. Commodity prices may see added risk as tensions remain elevated.
Traditional fixed-income investments (bonds) are likely to post better returns in 2024 relative to the previous two years. The risk/return relationship of such an outcome, however, remains poised for added uncertainty and credit risk. We view fixed income as a greater long-term risk than equity market participation.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful. International investing involves special risks, such as currency fluctuation and political instability, and may not be suitable for all investors. These risks are often heightened for investments in emerging markets. Investment advice offered through CX Institutional, a registered investment advisor.