Looking forward to 2024

The year is ending with satisfied bond investors and an equity market rally. Central banks continue to be the main market driver. A more accommodating tone than expected from the Federal Reserve after its December policymaker meeting has markets focusing more on potential interest rate cuts than the recent “higher for longer” rate scenario. It even seems possible that the US Federal Reserve and the European Central Bank (ECB) have secured the almost unthinkable “soft landing” for their economies – where inflation declines without a recession.

The continuing war in Ukraine, a new war between Israel and Hamas and volatile oil prices added to uncertainty in 2023. But confident consumers, boosted by savings and disposable income, have supported markets.

Although the outlook for monetary policy now appears that it may become more accommodative sooner than had been expected, there is still a way to go. As Fed Chair Jerome Powell said after the central bank’s December policymakers meeting, “It is far too early to declare victory, and there are certainly risks.” The risks in 2024 that we see include the possibility of Donald Trump regaining the White House and potential trade issues between the EU and China. While we do not expect a significant downturn, we expect below-trend growth in the US (1.8%) and sluggish growth in Europe (0.4%) in 2024.

In this environment, the ABN AMRO Investment Committee made no changes to the asset allocation. It continues to reflect a neutral stance toward both bonds and equities.

This year, equity market returns have diverged on all fronts – in terms of regions, sectors and, especially in the US, at the stock level, where a handful of artificial-intelligence-related stocks raised the returns for the entire S&P 500 Index.

Year-to-date MSCI returns in the US and Europe have far exceeded returns in emerging markets. And, in terms of sectors, the information technology, telecommunications and consumer discretionary sectors have had positive returns of over 20% (in euro terms), while the energy, consumer staples and health care sectors had significant negative returns.

We believe that earnings momentum is stabilising in the US but slowing in Europe. In both regions, earnings are under pressure, as evidenced by the up/down ratio, where analysts are instituting more earnings downgrades than upgrades. We expect that earnings momentum will remain under pressure for the next four to six months, as economic growth slows and with interest rates still high. We therefore remain slightly cautious and are comfortable retaining a neutral stance toward equities going into 2024.

There has been a broad-based rally in bond markets. Ten-year Treasury and Bund yields, for example, have both fallen significantly. US Treasuries, moved from slightly below 5% to below 4% in just a few weeks, while yields on ten-year Bunds declined from just below 3% to 2.1%. (When bond yields fall, bond prices rise.) It appears that the bond market has priced-in a full cycle of interest rate cuts far in advance of any central bank action.

We do not expect a central bank “pivot” in interest rates until June. Given our expectation for sluggish growth, we continue to prefer high-quality bonds, such as sovereigns and investment-grade corporates. Over the past month and as bond yields fell, we have taken some profits on a long (overweight) duration position, but remain slightly overweight duration.

The market, interpreting a change in tone after the Fed’s last meeting, appears, at least temporarily, almost exuberant. The rise in equity markets, however, is not broad-based, with a number of sectors staying in negative territory year-to-date. Earnings in the US and Europe are also under pressure. At the same time, our expectation for sluggish economic growth holds us back from riskier fixed-income segments. While we expect more opportunities to open up in 2024, for now, there remains enough uncertainty to continue to trust our stance of a neutral approach to both stocks and bonds, as we close out 2023 and look forward to 2024.

Richard de Groot, Chair, ABN AMRO Investment Committee