Articles | February 16, 2024

After a Year that Upended Most Expectations, More Surprises May Lie Ahead

As 2023 began, the expectation for a recession was high; interest rates were expected to decline; and the consumer was expected to slow spending.

None of this came to pass.

There was no recession; a soft landing came to fruition (so far); interest rates did not decline till late in year — due to the market, not actions taken by the U.S. Federal Reserve (the Fed) — and the consumer remained strong.

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This was despite three bank failures/takeovers in March, conflicts in the Middle East, the ongoing Russia/Ukraine war, budget standoffs and a downgrade of U.S. debt rating; but on a positive note, inflation declined.

At year-end 2023, the U.S. and non-U.S. areas are on solid footing with regards to the economy and labor. One big 2023 surprise was the strength of the consumer.

In 2023, more central banks kept their interest rate policy the same and there were far fewer rate increases than in 2022.

Following late-year support for more stocks than just the large cap technology-oriented companies that performed well throughout the year, 2023 was a positive year for equity markets around the globe, although non-U.S. stocks underperformed their U.S. counterpoint.

2023 was another volatile year in the bond markets, but we ended the year almost where we started. Notably, there was less inverted yield curve in 2023 than we have experienced over the last two years. Treasuries remain a major anchor for the U.S. fixed income markets. Non-U.S. markets fared pretty well in 2023.

Private market assets had a large dichotomy in return profiles. Private equity provided a reasonable return and lower volatility profile, versus largely negative equity returns for a large part of 2023. Through September 2023, real estate returns were negative, with fourth quarter preliminary numbers reporting the most significant valuation declines for the year. Private credit faced both headwinds and tailwinds. The higher and more predictable cash flows associated with many infrastructure sub-sectors as well as the asset classes’ inflation protection characteristics (particularly for segments such as power generation, transmission or bulk storage) have helped mitigate the impact of higher interest rates.

What is our outlook?

The consumer feels a little tapped out, and while inflation is in check, there are yellow flashing lights around both factors that need to be monitored as we begin 2024. Inflation is an area to watch, particularly for energy.

Like inflation, interest rates will continue to dominate the 2024 outlook. But, on average, it seems that interest rate volatility may have peaked, and 2024 could provide more downside than upside in rates than we have seen since the rate cycle began in 2022.

We will need to see continued support from earnings in 2024 to keep the positive momentum for stocks. Cash held in money market funds is a wild card for 2024.

Developed market yields for fixed income are as compelling today as they’ve been in many years.

The energy transition remains one of the areas expected to provide substantial flow over the coming years, as well as ongoing activity in transmission, data, core services and transportation. The outlook is for solid, stable income and return generation in core infrastructure and higher potential returns for value add and opportunistic infrastructure.

Finally, the elevated geopolitical backdrop continues to be a wild card for global markets, one that cannot be factored in, but does raise volatility.

What does our Investment Outlook cover?

The February 2024 Investment Outlook includes tables that provide a snapshot of our forward-looking observations on the direction of specific asset classes.

Specifically, for 19 asset classes, we select one of five outlook signals based on our 12–18-month perspective relative to our 10+-year CMAs. The signals range from an above-normal return outlook to a below-normal return outlook.

The asset classes include equities, fixed income and these alternatives:

  • Hedge funds
  • Multi-asset class strategies
  • Private equity
  • Real estate
  • Infrastructure
  • Commodities


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