Multi-Asset Outlook 2024: Embracing the “Less Exceptional”

After pandemic-era extremes, growth and inflation should approach historical averages in 2024. Here’s how multi-asset investors can respond. 

The turmoil of the post-pandemic period should continue to subside this year, leaving a “less exceptional” landscape for investors to navigate. Inflation is cooling across most major economies, which is particularly welcome news. In the US, December’s Consumer Price Index rose 3.3% year over year, well off its peak of 8.9% in June of 2022, but still above the Fed’s 2% target. Central banks are starting to signal willingness to cut rates, should this trend hold.

Recession Talk Pivots to Slow-Growth Expectations

The fears of an economic contraction that dominated 2023 have faded. Today, the consensus is for slow but positive growth for developed markets (Display 1, left). Companies are increasingly optimistic too; fewer earnings calls mention “recession,” while references to “slow growth” and “resilience” have increased (Display 1, right). 

Over the past few years, the global economy has endured a series of extremes in economic growth, inflation and policy response. The collapse in global growth in 2020 was followed by a sharp recovery in 2021 as economies started to reopen and massive policy support started to flow through (Display 2, left). This was followed in 2022 by an historic uptick in inflation (Display 2, center) that led to aggressive monetary tightening in developed economies, where extreme rate changes began to shift closer to normal between 2022 and 2023 (Display 2, right).

We saw the beginnings of a gradual return to normal in 2023. Consumer spending power improved as inflation faded, services sectors recovered, more jobs were filled, excess inventories fell, and commodity and housing prices cooled. We expect more progress toward this “new normal” in 2024, with growth and inflation tracking toward to pre-pandemic trends. 

Spending Up Among Consumers, Down for Businesses  

So far, resilience in household consumption has been mostly a US phenomenon. US consumers benefited from stronger wealth effects and low exposure to rising rates and were willing to reduce savings rates to keep spending. In contrast, EU and UK consumers increased their saving rates to anticipate rising interest payment obligations. Therefore, with inflation and rates now falling, we think spending appetite will improve outside US.

We expect labor markets to stay resilient in 2024, but with job creation slowing to more sustainable levels. This should continue to prop up consumer spending as well.

Business investment is slowing across developed markets after an extended robust period early in the post-pandemic recovery. Spending intentions have plunged (Display 3, left), while bottom-up estimates now suggest low single-digit growth. While spending on equipment and structures is likely to slow, gradual recovery in US tech investment—software and equipment, in particular—should help limit the downside (Display 3, right).  

Fiscal and Monetary Policy Likely to Normalize

The combination of closer-to-normal economic growth and easing inflation will be key to policy normalization in 2024. Aggressive fiscal spending has bolstered the US economy, but the impact on growth is fading. The International Monetary Fund projects modestly contractionary fiscal policy across most major economies this year.

The era of exceptionally restrictive monetary policy should start fading, too. Rate hikes have likely peaked, with cuts expected in 2024. This should reduce mortgage rates and help residential investment. US markets expect easier policy than the Fed’s projections show (Display 4), an assumption that may be tested if growth stays resilient.

What “Normalization” Means for Multi-Asset Investors

We expect economic normalization to translate into a return-to-growth mode for corporate earnings. While economic growth has been positive, over the past year corporate earnings have been challenged by inventory adjustments, commodity price volatility and a lack of operating leverage for service companies. These headwinds have now faded, which we think provides a favorable environment for equities and other risk assets. In fact, stocks have outpaced other assets when rate cuts happen outside of recessions—which seems increasingly likely.

Look for growth and quality in stocks. Stocks rallied in 2023, led by a few tech names; we see this momentum lasting into 2024, given the improved economic picture. We see EU stocks benefiting from improving growth prospects while a gradual recovery in tech investment and AI prospects could continue to support US equities. We remain cautious on emerging markets, given China’s muted growth outlook.

Fixed income offers more potential. Bonds rallied in late 2023 and yields are now well below October highs. While markets have priced in several rate cuts in 2024, we believe bonds can provide good diversification if growth disappoints. Given our relatively benign economic outlook, we think it’s sensible to stay close to neutral in allocations to duration, or interest-rate risk. We do think US and UK sovereign bonds are relatively attractive, given the fact there’s more room for policy normalization.

Diversifying asset classes remain important building blocks. In the current climate, we think a neutral commodities exposure is the best course. Prices have been declining toward pre-pandemic levels because of subdued goods demand and muted China stimulus, though ongoing geopolitical risks could hold some upside in certain scenarios.

The pandemic era brought exceptional volatility to economic growth, inflation and asset returns. We expect this landscape to shift closer to historical “norms,” which could make it more amenable to multi-asset investors. As always, it’s important to stay flexible and selective to navigate the transition.