Representatives from Allianz Investment Management LLC provide commentary on market and economic indicators, including Federal Reserve actions, interest rates, credit markets, and economic releases such as inflation, GDP, consumer confidence, housing, retail sales, and job unemployment news. Here is their 2024 outlook.
Last year surprised investors, strategists, and portfolio managers alike. The S&P 500® had a banner year as credit spreads tightened despite issues in the banking sector, and the most widely predicted recession never occurred. This all materialized in the face of 100 basis points of increase in short-term rates by the Federal Reserve during the first three quarters. Surprisingly, growth remained solid with GDP well above 2%, while inflation began to subside as the general cost of goods and services declined. While the fight against inflation is not quite over, we do expect the Fed to implement a few interest rate cuts as they attempt to orchestrate a soft landing for the economy. We anticipate that these rate cuts will be shallow and sporadic, allowing the Fed to react should inflation reignite. We believe there is a good chance for the U.S economy to come through the other side of inflation unscathed, but not without a a few bumps along the way.
In 2024, our forecast sees both the U.S. economy and domestic financial markets continuing to normalize. We expect the rate of inflation will recede, but likely not quite to the Fed’s 2% target. Fixed income and equity returns are likely to revert to more “trend-like” levels, and economic growth should remain positive but lower than last year. While nothing is certain, we see potential event risk that could lead to heightened volatility for the U.S. economy and markets. The expected recession of 2023 has been all but forgotten, but many Fed tightening cycles conclude with such economic slowdowns and may catch investors by surprise. Geopolitical events and the ramp up to the Presidential election also have the potential to bring periods of elevated instability. We acknowledge these risks, but feel they can be offset as the Fed shifts from a tightening monetary policy stance to one that is more accommodative. Overall, we are very constructive on the U.S economy and financial markets this year, but acknowledge the potential for some points of instability along the way.
Real GDP outperformed most analyst estimates for 2023, led by a stronger employment picture, robust consumption, and a highly anticipated recession that did not materialize. Our base case sees Real GDP growth lower in 2024. This is based on a slight economic slowdown as pandemic savings continue to decline, with student loan repayments beginning and household debt increasing. We expect this will lead the Federal Reserve to begin reducing short-term interest rates to prevent a deeper slowdown. On this premise, we expect Real GDP growth to be in the range of +1.0% to +2.0% for 2024.
“Higher for longer” was the previous mantra for the Fed throughout 2023, but now that we have turned the corner on inflation the narrative has shifted to “higher for how long?” The December FOMC meeting was a pivotal point for the Fed, as the release of the so-called “dot plot” indicated that Fed officials are expecting 75 basis points of rate cuts in 2024. Market perception has leaned toward more than that, but we suspect the Fed will likely maneuver carefully in 2024 by focusing on the conclusion of quantitative tightening first. Unlike previous Fed cycles, we do not expect the first rate cut to be very deep, as the Fed is expected to move in a measured way to avoid reigniting inflation. With this backdrop, we are expecting a series of three to five 25-basis-point cuts to begin at some point in the second quarter. Consequently, our outlook is for Fed funds to end the year in a range of 4.25% to 4.75%.
The Federal Reserve’s work to slow the overheated U.S. economy seems to be working as anticipated. Consumer prices steadily declined throughout 2023, and we expect that momentum to continue into 2024. Fed Chairman Powell seems staunch on achieving their 2% inflation target, so we expect interest rates to remain elevated to further stabilize prices unless the economy begins to recess. Shelter costs continue to be a stubborn component of the inflation story. Those should ease, allowing both CPI and PCE to further moderate. We believe that the Fed’s tightening policy has peaked, but there clearly is more work to be done. The inflation story for 2023 can be delineated into two separate themes with goods prices turning deflationary and services inflation remaining elevated. Looking forward we expect more of the same as our outlook for Core PCE (excluding food and energy) improves from its current level but remains elevated and ends the year between 2.0%-3.0% in 2024.
Treasury yields experienced a volatile year in 2023 with a perfect storm of Fed tightening, a Fitch downgrade of the U.S. credit rating, deficit spending, and quantitative tightening, leading the 10-year to peak just over the 5% level. With inflation subsiding and the Fed pivoting toward rate cuts, the 10-year yield is now hovering around 4%, which appears to be an appropriate level given the expected macro backdrop. With the soft-landing scenario in play, we expect to see lower volatility in the 10-year than we witnessed in 2023. We do think most of the changes in Treasury yields will come through the front end and the belly as the curve eventually steepens. Our outlook has the U.S. 10-Year Note yield finishing the year in a range of 3.75% to 4.25% for 2024.
Equity returns were concentrated in a few large-cap names for a majority of 2023; however, the rally broadened once investors were confident that inflation was in retreat. We see continued positive momentum carrying into 2024, and we believe this view is supported by recovering fundamentals. According to FactSet, Wall Street strategists look for improved revenue growth over 2024 and a better than average earnings growth rate to propel the S&P 500® higher. Additionally, lower inflation and lower expected interest rates will also support U.S. stock prices. We agree that U.S. equities will advance, but our view also includes a mild economic slowdown, which could impact the timing of profits. Lastly, 2024 is also a Presidential election year, which adds uncertainty to equity performance, but is generally considered a positive for the U.S. stock market. Our 2024 outlook for the S&P 500 Index® is to return 0.0% to +10.0%.
Table Columns
Previous – Observation as of the end of the prior month
Survey – Economist survey prediction for current month’s observation
Actual – Actual observation as of the end of the current month
Next – Date of next period’s observation
ISM Manufacturing Index
Based on a survey from the Institute for Supply Management, this index indicates a positive growth in the manufacturing sector when the figure is above 50 and a contraction of the sector when it is below 50. An increase in the figure indicates either slowing contraction or accelerating growth. The index represents underlying figures in employment, inventories, new orders, production levels, and deliveries. (Source: Bloomberg)
Unemployment rate
Based on a monthly survey of households, the unemployment rate is one of many figures in the Current Population Survey that move markets by indicating what portion of the population is at work, looking for work, what they are getting paid, and how many hours they work. The unemployment rate is the percentage of workers unable to find work who are actively seeking a job. The survey is conducted by the Bureau of Labor Statistics.
Retail sales
Retail sales measure the total amount of purchases by consumers in stores that sell merchandise, food, and other services to end consumers. This measure is a significant indicator of trends in consumer spending, which moves markets because consumer spending accounts for over two-thirds of U.S. economic output. Data is compiled by the U.S. Bureau of the Census.
Consumer Price Index (CPI)
The Consumer Price Index measures the prices of a fixed basket of goods that reflect an average consumer’s cost of living. CPI is a popular indicator of inflation, driving prices on U.S. inflation-linked bonds, and is used to adjust tax brackets and Social Security payments. CPI is compiled by the Bureau of Labor Statistics monthly.
Home Price Index
The S&P CoreLogic Home Price Index is the seasonally adjusted average price of residential homes in 20 major cities in the U.S. Data is published with a two-month lag (numbers available in March reflect price changes from January). Housing prices affect consumer wealth and consumers’ ability to borrow and spend, which in turn affects U.S. economic growth.
Gross Domestic Product (GDP)
Gross Domestic Product is the sum of the value of all goods and services produced in the economy. It is one of the most comprehensive benchmarks for economic performance. Real GDP measures economic productivity adjusted for inflation, which measures growth that is not due to goods getting more expensive. GDP is published by the Bureau of Economic Analysis.
University of Michigan Consumer Sentiment Index
The index is derived from surveys of 500 households by the University of Michigan on consumer finances and attitudes regarding the economy. The index is set to 100 as of 1966, reached a high of 107.3 in June of 1999 and a low of 56.4 in June of 2008. High consumer confidence levels lead to robust consumer spending, whereas low consumer confidence levels lead consumers to pull back on spending.
S&P 500® Index
The S&P 500® Index is a market-capitalization-weighted index of the 500 largest U.S. publicly traded companies by market value.
Chicago Board Options Exchange (CBOE)
Volatility Index® (VIX® Index)
Created by the Chicago Board Options Exchange (CBOE), the Volatility Index®, or VIX®, is a real-time market index that represents the market’s expectations of 30-day forward-looking volatility. Derived from the price inputs of the S&P 500® index options, it provides a measure of market risk and investors’ sentiments.
The views, opinions, and estimates expressed above reflect the views of Allianz Investment Management LLC (AIM LLC) as of January 2024. This document is provided for informational purposes by AIM LLC, a registered investment adviser that is a wholly owned subsidiary of Allianz Life Insurance Company of North America. These views may change as interest rates, market conditions, tax rulings, and other investment factors are subject to rapid change which may materially impact analysis that is included in this document. This report does not constitute a solicitation or an offer to buy or to sell any security, product, or service. It is not intended and should not be used to provide financial advice as it does not address or account for an individual's circumstances. Consult with your advisor and tax professional before taking any action based upon the information contained in this document. Past performance does not guarantee future results and no forecast should be considered a guarantee. Any investment and economic outlook information contained in this document has been compiled by AIM LLC from various sources, including affiliated entities. AIM LLC takes reasonable steps to provide up-to-date, accurate, and reliable information, and believes the information to be so when provided, but no representation or warranty, express or implied, is made by AIM LLC as to its accuracy, completeness, or correctness.
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