To get where you want to go, it may help to look first at where you’ve been.
With ongoing uncertainty, economic and market volatility, and geopolitical upheaval, we dive into the outlook for 2024 with Regions Chief Economist Richard Moody, Chief Investment Officer Alan McKnight and Chief Market Strategist Brandon Thurber for their thoughts on the past year and respective insights on what may lie ahead.
Moody recently published his annual economic outlook “Even More Stuff May or May Not Happen in 2024,” positioned as an apropos follow-up to his 2023 “Lots of Stuff May or May Not Happen in 2023.”
Inflation and Interest Rates in 2023
Inflation was a core theme of 2023 and will remain key to economic conversations, though likely with the more muted tone that developed towards the end of 2023. The Federal Open Market Committee (FOMC) tamped down the rapid-fire series of rate hikes that saw the Fed funds rate rise by 550 basis points in under 18 months.
According to Moody, higher interest rates contributed to the moderation in inflation, but the primary factor was the supply side of the economy healing. As he noted in his report, improved labor force participation amongst the prime working age cohort, increased immigration contributing to growth in the labor force, faster productivity growth, and supply chains/logistics networks becoming normalized all helped fuel the deceleration of inflation.
“Falling energy prices helped pull down headline inflation over the final few months of 2023,” noted Moody. “Falling core goods prices, i.e., prices of consumer goods excluding food and energy, also helped stem inflation pressures.”
Some Things Haven’t Changed
One thing that seemingly hasn’t changed from a year ago, according to Moody’s latest report, is that as 2024 begins many of the open questions looming over the U.S. economy revolve around the paths of monetary policy and overall financial conditions and how those will, in turn, impact the broader economy.
“The obvious difference here, however, is that a year ago those questions were around how much higher the FOMC would push the Fed funds rate and how much overall financial conditions would tighten, whereas this year those questions are around when and by how much the FOMC will cut the funds rate and how much overall financial conditions will ease,” he noted.
The Case for a Soft Landing
“One thing that did not happen, and that we did not expect to happen, in 2023 was the U.S. economy slipping into recession. That we did not have recession as our base case put us at odds with the vast majority of our counterparts, or perhaps we should say kept us at odds with them,” Moody noted. “As 2023 wore on, however, more and more forecasters began to abandon their recession calls and embrace the ‘soft landing’ narrative.”
McKnight and the Asset Management team believe that the U.S. economy may experience a period of slowing economic growth early in 2024 before returning to a more sustainable expansion.
According to a recent presentation by the Regions Asset Management team regarding the firm’s capital markets expectations for the coming decade, a soft landing appears increasingly likely on the heels of recent economic data pointing toward inflation falling and the labor market remaining strong. However, if economic growth surprises to the upside and the unemployment rate doesn’t rise from here, a no landing scenario will gain more traction.
“A no landing outcome would likely give central bankers some heartburn as easing financial conditions and a continued strong labor market could reignite inflation and force a policy shift that prevents the FOMC from delivering on the market’s expectation surrounding rate cuts in the coming year,” noted Thurber.
A soft landing could bode well for small-cap stocks. McKnight and the Asset Management team believe that the U.S. economy may experience a period of slowing economic growth early in 2024 before returning to a more sustainable expansion. They noted that such a backdrop would boost cyclical sectors such as financial services, industrials and materials that are relatively high exposures within small-cap indices.
Let’s Talk Labor Markets
In his report, Moody noted that the labor market is cooling, but not crumbling. He points to the labor market’s influence on the broader economy and notes it as a key factor in how the U.S. economy will perform in 2024.
“We were mostly on the mark in how we thought the labor market would evolve over the course of 2023,” Moody said. “Our 2024 labor market outlook is not that different than our 2023 outlook. We expect the trend rate of job growth to continue to slow which in turn will put upward pressure on the unemployment rate, which we expect an average 4 percent in the fourth quarter of 2024. As we did last year, we expect slowing job growth, as opposed to rising layoffs, to be the primary source of upward pressure on the jobless rate.
Back to Inflation
Inflation is lower, but still isn’t quite there yet, noted Moody.
“‘There’ being the FOMC’s inflation target of 2 percent,” he stated in his report. “While 2023 did see considerable further progress on the path to that target, inflation as measured by the Personal Consumption Expenditures (PCE) Deflator, the FOMC’s preferred gauge, stood at 2.6 percent as of November and core PCE inflation stood at 3.2 percent.”
While we agree that inflation will trend toward the FOMC’s 2 percent target over coming quarters, the path back to that level could be filled with fits and starts and take longer than the consensus expects.Brandon Thurber, chief market strategist
Thurber and his team do not expect U.S. core inflation to trend back toward 2 percent in a predictable and orderly manner.
“While we agree that inflation will trend toward the FOMC’s 2 percent target over coming quarters, the path back to that level could be filled with fits and starts and take longer than the consensus expects, said Thurber. “This feeds into our view that the FOMC may not ease monetary policy as aggressively as the market currently expects.”
Don’t Get Rattled by the Noise
As for strategic allocation, McKnight noted on the Jan. 5 Weekly Markets Update Call that it is important to look at the catalysts that may drive outperformance. His advice for 2024 is not to get caught up in the short-term shifts.
“The other element we continue to focus on is ensuring we still have exposure,” McKnight shared. “Going into last year, there was a lot of negative sentiment. We believe in standing by your strategic allocation – believing the long-term opportunities are there and having the right allocations without moving too much in the short-term.”
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