Outlook 2024: A Turning Point

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Recently, the LPL Research team published the 2024 Outlook: A Turning Point. It offers a check-in on where the markets have been and where they seem to be headed. This report is a great guide to help steer personal portfolios. If you haven’t read it yet in its entirety, take a minute to tap into some of the key takeaways.

Economy

The economy grew faster than expected in recent quarters, as unemployment remained historically low, and activity in some sectors grew (e.g., homebuilding), despite the macro headwinds. In 2024, we believe a mild recession is likely to emerge as consumers buckle under debt burdens and use up their excess savings. But a Fed that’s sensitive to risk management might provide an offset by taking interest rates down a bit.

Stocks

We believe stocks are entering a phase in which investors will be focused on interest rate stability. And while rates may be the most impactful driver of stock valuations, corporate profits are moving into a sweet spot. If rates ease as we expect, we see upside to a year-end 2024 fair-value target range of 4,850 to 4,950 and believe stocks could provide mid-to-high, single-digit returns in 2024. Risks include a potential widening conflict in the Middle East or Europe, an increase in U.S.-China tensions, and a reacceleration in inflation that pushes interest rates higher.

Bonds

The move higher in yields in 2023 was unrelenting, rising alongside a U.S. economy that continued to outperform expectations. With a still resilient economy to date, we think Treasury yields could stay relatively high in the near term, although rates may subside a bit versus the volatility seen in 2023. The issuance of Treasury securities to fund budget deficits and the potential for the bank of Japan to finally end loose monetary policies in 2024 could keep some upward pressure on yields. However, the big move in yields may have already taken place, and with a potential directional change in interest rates likely coming in 2024, we believe bonds offer compelling value.

Geopolitics

With the onset of the war in the Middle East, geopolitical concerns have broadened as global leaders and diplomats try to encourage its containment. Meanwhile, both Russia and Ukraine continue to absorb losses—amid debates across NATO about the monetary and political costs associated with supplying Ukraine with military equipment. As part of this backdrop, the U.S. has focused on keeping China from acquiring advanced semiconductor technology that can be applied to its expanding military buildup. We’re not expecting this backdrop to materially improve but believe that risk alone is often not enough to derail opportunities.

Commodities

With renewed expectations that the Chinese economy could be supported by a broad fiscal package, coupled with forecasts that global central banks have, for the most part, completed their respective rate-hiking campaigns, the economic backdrop should remain constructive for oil demand. A potential widening of the Middle East conflict could send prices sharply higher amid tight stockpiles of crude and OPEC+ production cuts. However, should the global economy slow materially more than what is projected, crude demand may be somewhat offset. A more aggressive fiscal package from China targeted for infrastructure spending is a possible catalyst for industrial metals. Precious metals, especially gold, have seen prices rise amid heightened geopolitical and currency risk, and will garner further support in 2024 if the markets continue to consider those risks.

Currencies

The U.S. dollar staged a strong comeback over the second half of 2023, and global capital was enticed back to the U.S. on clearer prospects of economic growth and higher rates of return. The dollar remains quite overvalued, however, on a purchasing power parity basis against currencies like the yen, euro, and British pound. But unless global markets shift toward synchronized global growth, a scenario we are not expecting, foreign currencies will likely struggle to meaningfully outpace the dollar.

Alternative Investments

After the strong recovery of the equity markets in 2023 and the continued rise of short-term yields, markets have started to calibrate for the new market era. This new direction includes greater dispersion and volatility amid continued decoupling of global economic and policy actions, slowing economic activity, and rising geopolitical risks. This adds up to an environment that’s conducive for strategies that are nimble, can generate excess returns from both top-down macroeconomic forecasts as well as bottom-up fundamental analysis, have limited stock market sensitivity, and benefit from the rise in volatility.

These are just some of the high-level insights from the report. For in-depth analysis and further perspectives, read the full Outlook 2024: A Turning Point.