2024 Economic and Market Outlook
Analysis, insights, and expectations from members of Commonwealth's Investment Management and Research team
Executive Summary
Despite recession fears, 2023 was a surprisingly robust year for the economy. We expect the positive trends to continue in the new year, which should support continued financial market performance. But that doesn’t mean the road ahead will be smooth.
Read on to learn what we see in the data and how we think it will contribute to our expectations for 2024.
By the Numbers: A Trail Map for Year-End 2024
Inflation | GDP Growth | Fed Funds Rate | U.S. Treasury | S&P 500 |
2.5%–3% | 3.75% | 4.75%–5% | 4%–4.5% | 4,700–4,800 |
Source: Commonwealth, as of December 14, 2023
U.S. Economy: Sustaining Our Upward Momentum
In December 2022, many economists seemed convinced the economic drivers were grinding to a halt. An unwinding of the Fed’s balance sheet, higher interest rates, and an inverted yield curve seemed like the perfect storm that would rain on the economic parade.
But over the past 12 months, the economy has done anything but slow down. We’ve seen job growth, increased consumer spending, and higher gross domestic product (GDP) growth than expected. Compared to the pre-pandemic decade, it was an exceptionally robust year.
Will those trends continue in 2024? Click the tabs below to learn how the four components of the economy factor into our outlook.
American consumers are the grease in the economic engine. Their ability and willingness to spend are pivotal to economic growth, especially in the near term. Low unemployment and higher salaries are creating a just-right scenario for this to play out.
Employment and wage growth. Strong labor demand has led to some of the largest wage gains we’ve seen in decades. Wage growth will likely stay elevated given the significant imbalance of job openings to unemployed individuals.
Spending and saving. With more money in their pockets, consumers are spending more. But they’re also saving less. Credit card debt as a percentage of the personal saving rate has increased at the fastest pace since 2007, according to Standard & Poor’s. This should translate into near-term growth since roughly two-thirds of GDP is related to consumption. It bears watching over the long term, though, as carrying too much debt can be detrimental to long-term growth.
What are consumers spending their money on? After several years of one-sided spending, the path ahead is starting to even out. During the early days of the pandemic, consumer-related goods were the focus. Demand, hampered by supply chain issues, drove up prices.
As the economy reopened, Americans’ spending habits shifted to the service sector, focusing on areas like travel, sporting events, and dining. Prices on goods and services reflected that change.
In 2024, we believe we’ll see goods and services spending, which have historically moved in lockstep, come back into balance.
Risks to this outlook. A notable breakdown in consumer confidence—which could result from an uptick in unemployment, an increase in inflation, or more rate hikes—would likely manifest in slower spending, presenting a headwind to growth.
Confidence has been declining in recent months, but the Conference Board Consumer Confidence Present Situation Index remains in a healthy range as of the end of October. We believe this should support the consumer segment of the economy heading into 2024.
Keeping the Bears at Bay
Many economists were solidly in the recession camp in the fourth quarter of 2022. Our outlook differed to a large extent, and that’s the case this time around, too. We expect a Goldilocks economy—one that offers full employment, economic stability, and moderating inflation. This foundation will offer an ideal state for the financial markets and keep the bears at bay.
Inflation and Rates: Leveling Off at Last
Inflation and interest rates have been two major drivers of market performance over the past two years, and they are expected to remain important in 2024.
In 2021, global supply chain pressures, labor and material shortages, and loose monetary and fiscal policy caused inflation to spike. Thus began the Fed’s rate-hiking cycle to combat inflationary pressures in the economy. The fed funds rate increased from a range of 0 percent to 0.25 percent in 2021 to a range of 5.25 percent to 5.50 percent by the end of November 2023. And the effects of those hikes are starting to show up.
Growth in the Consumer Price Index (CPI), a key measure of price changes over time, moderated in October, coming in at 3.2 percent. While prices for food, energy, and commodities have declined, service inflation remains high partly due to housing costs. And because housing costs respond with a lag to higher rates, this could slow headline progress in the Fed’s pursuit of its 2 percent target.
Higher for Longer
As a result of that lag, we expect interest rates to remain elevated. Markets project four rate cuts of 25 basis points (0.25 percent) in 2024. We believe the Fed may make one or two moderate cuts, bringing the federal funds rate to 4.75 percent to 5 percent by year-end. Medium- and longer-term rates should be rangebound, with the potential for a modest fall in yields if the Fed signals an appetite to cut rates.
Financial Markets: Which Path Will They Take?
Click to expand the sections below.
Politics and Policy: Will Washington Push Us Off Track?
The current battles in Washington are rooted in politics. Next year, they will be based on economics—generating a potential headwind.
Political Risks
Emerging political risks should be relatively low.
ElectionsThe presidential election will include ads aplenty around the existing administration and the challengers. Investors may have trouble keeping their cool in this heated environment. | Divided GovernmentA government shutdown is possible, but neither party seems to want it. Some of the more obstructionist politicians have even voted it down, and that’s progress. |
Policy Risks
In 2024, the deficit will again take center stage.
Deficit and DebtPersistently high rates could slow the economy, resulting in lower tax receipts and an increase in the interest owed on federal debt. The uncertainty surrounding higher rates will also increase economic and market risks. | Taxes and Government SpendingAs key components of the economy, taxes and government spending will provide fodder for the November election and grab the headlines. |
Geopolitical Risks: Navigating Turbulent Waters
Geopolitical risks are dominating the headlines. Market expectations are low, which means there could be room for upside.
Ukraine war. Here, one of the major economic effects has been Ukraine’s inability to export food—a constraint that’s being lifted as Russia is forced out of the Black Sea. This problem will continue but looks to become less extreme.
Israel-Hamas war. It appears that most regional players don’t want a wider war in the Middle East, which should limit the global economic damage. As the situation evolves in 2024, it may become less threatening to the world as a whole.
Financial crisis in China. Although Chinese real estate companies continue to get into deeper financial trouble, the Chinese government has the ability and the will to contain the problem, which will limit the global effects.
Deglobalization. This is a long-term trend, and it's been underway for some time. Companies are figuring out how to make it work. The disruptions, while real, are also likely to be less than currently expected.
The real takeaway for 2024 is that, from a geopolitical point of view, it is likely to be very much like 2023. While we need to be aware of the risks, we also need to remember that markets price around risk, and they can rise even in the face of it.
Contributors
Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. All indices are unmanaged and are not available for direct investment by the public. Diversification does not assure a profit or protect against loss in declining markets. Bonds are subject to availability and market conditions; some have call features that may affect income. Bond prices and yields are inversely related: when the price goes up, the yield goes down, and vice versa. Market risk is a consideration if sold or redeemed before maturity.
The S&P 500 is based on the average performance of the 500 industrial stocks monitored by Standard & Poor’s. Emerging market investments involve higher risks than investments from developed countries, as well as increased risks due to differences in accounting methods, foreign taxation, political instability, and currency fluctuation. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. It excludes closed markets and those shares in otherwise free markets that are not purchasable by foreigners. The MSCI ACWI ex USA is a free float-adjusted market capitalization-weighted index that is designed to measure the equity market performance of developed and emerging markets. It does not include the United States.
Investments are subject to risk, including the loss of principal. Past performance is no guarantee of future results.
This material is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product.