Daily Management Review

Market Speculations For 2024 Are A Complete Mess Due To The US Recession Dilemma


Market Speculations For 2024 Are A Complete Mess Due To The US Recession Dilemma
Diverse forecasts for the stock market and currency in 2024 have been made by investment banks and asset managers, indicating a fundamental disagreement about whether the US economy will experience the long-awaited global recession.
In sharp contrast to a year ago, when most analysts anticipated a U.S. recession and swift rate cuts that did not come to pass, there is currently no consensus among them. In Q3 of this year, the largest economy in the world grew by 5.2%.
This year, the divisions have created a scattergram of forecasts for the trajectory of U.S. interest rates and the performance of international assets that are impacted by the Federal Reserve's decisions.
Because of the short-term consensus that inflation and interest rates are headed sharply lower, market investors are consequently bracing for a rough start to the new year following a big gain for both stocks and bonds last month.
"Whether the U.S. has a hard landing or a soft landing will dominate the market," said Sonja Laud, chief investment officer at Legal & General Investment Management.
"The narrative isn't clear yet," she added, noting that if current interest rate forecasts "were to shift significantly that creates significant volatility" .
Data from options trading indicates that investors are growing more concerned about shielding their portfolios against future spikes in stock market volatility.

A Reuters survey of economists projects an average 1.2% rise in the US GDP in 2024.
While economists agree that the Fed's most aggressive cycle of rate hikes in decades will create a slowdown, they disagree as to whether or not 2024 will also see a few quarters of economic contraction, which may lead to rate cuts and depreciate the value of the dollar.
The biggest asset management in Europe, Amundi, has changed its forecast, predicting a U.S. recession in the first half of 2024. As a result, the business is now bearish on the dollar and favours assets in developing markets.
As the Bank of Japan is anticipated to ultimately depart from its ultra-easy monetary policy, the Japanese yen will be the market's "bright spot" in terms of foreign exchange, according to Amundi CIO Vincent Mortier.
Not too far off 30-year lows, the yen is currently trading at about 147 per dollar.
However, Morgan Stanley believes there isn't a recession and that the Fed may keep interest rates high long into 2019. It sees the euro falling to $1, the yen recovering only little to 142 per dollar, and the dollar index climbing to 111 points from 104 now.
Forecasters are split between what Stuart Kaiser, head of trading strategy at Citi, refers to as the "converts and disciples" of last year's strong recession consensus when it comes to U.S. stocks, which drive global equity markets.
"Some bears are (still) very dedicated and believe that if it didn't happen this year it has to happen next year," Kaiser said.
Deutsche Bank forecasts a slight U.S. recession in the first half of 2024 and a staggering 175 basis point fall in interest rates, with cheaper borrowing costs propelling the S&P 500 to 5,100 points. This year, the S&P 500 has risen 19% to 4,567.
JP Morgan expects a probable recession with the S&P 500 completing the year at 4,200, whilst Goldman Sachs sees relatively modest recession risk.
According to Blackrock Investment Institute (BII), equity analysts' expectations of S&P 500 earnings are currently the most spread since the COVID-19 pandemic.
LGIM, which manages over $1.5 trillion in assets, is underweight equities and anticipates a U.S. slump, according to Laud.
Meanwhile, other investors had moved on from the discussion over the US economy to look for new chances.
The major recommendation from Pictet Asset Management's chief strategist, Luca Paolini, is for gains in European shares, which the company feels are cheap.
The majority of economists predict that the recent increase in global inflation is gone. However, investors are divided on whether this entails sharp rate cuts, which typically drive up bond prices as yields decline.
Bond behemoth PIMCO favours government debt over stocks and estimates a 50% chance of a U.S. recession in 2024.
By late 2024, HSBC fixed income strategists expect the benchmark 10-year U.S. Treasury's yield to drop from its current 4.3% to 3%.
However, Insight Investment Management's global chief investment officer Adrian Grey claimed that the market for government bonds had already swung too wildly.
"We're seeing the Fed, the European Central Bank and the Bank of England all cutting (rates) from around Q3 next year," he said.
"Right now, government bond markets are pricing in more than that," he said, projecting yields would rise "a little," from here.