Dear Investors,
Which Macro scenario would you choose? Three scenarios for 2024 – (14 Must Update) DBS
Soft landing (60% macro probability)
The burden of high rates weighs in on US and EU demand, but a recession is unlikely in either area.
A gradual softening of US labour market materialises in moderation of consumption demand.
Similarly, in the euro area, growth flattens in the core economies.
This Macro scenario is contingent on an orderly financial sector. Liquidity stays ample despite quantitative tightening, US treasuries remain well bid by the private sector, USD weakens, and commodity markets stabilise.
No landing (25% macro probability)
As 2023 ends, the no-landing scenario has risen in probability.
A stroke of good luck and good timing is needed for this scenario to pan out.
Economies and markets rally in expectations of rate cuts, as has been the case lately, which in turn eases financial market conditions.
The Fed and other central banks don’t ease rates in 1H24, but they begin to remove restrictive policies as inflation risks abate during the second half of the year.
Hard landing (15% macro probability)
Macro Markets may be discounting the risk of a hard landing, and policy makers seem somewhat sanguine, but there are still several knife’s edge developments at play.
Firstly, inflation may be on a downtrend now, but could well prove to be stubborn in early 2024, heading back to over 3%.
If inflation and rates remain high, the risk of financial market accidents would rise, which in turn could cause disorderly outcomes in public and private debt markets.
The world is sitting on a mountain of public and private debt; if central banks fail to bring rates down, this could take the global economy on a dangerous path.
Arrived the Macro moment – what to know for 2024? Russell Investments
Global markets have exceeded expectations in 2023, thanks in large part to the mega-cap technology stocks known as the Magnificent Seven.
Our Macro outlook for 2024 is more cautious due to restrictive monetary policy, slowing growth, and geopolitical tensions.
What markets are pricing for 2024?
Markets are pricing closer to a smooth landing in 2024.
Government bonds look valuable as yields exceed inflation and could become more appealing as a hedge against stock market volatility.
As monetary policy changes, diversification within the growth side of portfolios will become more relevant, but elevated volatility will make it critical to be selective.
Are us recession risks still elevated?
Slowing jobs growth and declining inflation are signs the economy has begun to cool.
The good news is that the Fed has probably finished lifting interest rates and may contemplate easing during the first half of the year.
It also means, however, that we are entering a period of heightened uncertainty as investors debate whether recession can be avoided.
It may appear for a time that the U.S. economy has achieved a soft landing, but this could be a way point on the path to a mild recession later in 2024.
What’s the outlook for equities in 2024?
Slower economic growth and the threat of recession provide a cautious equity market backdrop.
The S&P 500 Index is expensive with a forward price-to-earnings ratio of 18 times as of November 2023 and has priced a soft-landing cycle view based on double-digit earnings growth expectations.
Asymmetry seems the best description of the outlook, with significant upside only if both the economy and earnings beat already optimistic expectations.