2024 is starting with widespread optimism. We focus on three key assumptions driving this outlook, including the coordinates of a soft landing, the inflation outlook and rate cut prospects. In the first quarter, markets will likely have to balance optimism with the challenge of finding the next catalyst for higher valuations.
Key takeaways
- Initial expectations are key, and solid growth is already fully priced.
- There has been substantial progress on inflation, but it has been lopsided, and services inflation may remain inconveniently high.
- Markets may have been too aggressive pricing Fed rate cuts, with important implications for investors in Q1.
At the start of 2024, optimism about the economy is high. It’s hard to argue the economy is not in good shape. The building blocks that sustain household spending—the labor market and the household balance sheet—are all solid. Outside of the unstoppable U.S. consumer, the rest of the economy also looks solid, and data so far show real gross domestic product (GDP) of 2.6% in Q4,1 which would imply full year growth of 2.9% in 2023 (Q4/Q4), far above potential GDP.
In the first quarter, we are watching three key pieces as the economic puzzle of 2024 takes shape. The first is the gap between sentiment surveys (which have been consistently downbeat) and hard data showing economic activity as resilient. The second is inflation, where our view is less sanguine than the consensus. Finally, at the start of the year, the markets have priced in significant Fed rate cuts, which have driven yields lower and caused equities to surge. In the first quarter, we expect the Fed to signal that—in the absence of a recession—the urgency around rate cuts is low and the markets have been too exuberant in both timing and magnitude. This is shaping up to be a unique monetary policy cycle, with significant implications for traditional equities and bonds.
Read the complete Q1 2024 economic outlook to learn more.
