Monthly Economic Review: January 2024

Key Takeaways

• U.S. growth surprised to the upside through 2023 and continues to be on solid footing entering 2024, although vulnerabilities are starting to emerge.
• Consensus expectations for six rate cuts appear ambitious and Fed policy will likely be less dovish than anticipated entering the year.
• Job market growth has stayed strong, defying skeptics anticipating a slowdown. The unemployment rate has been steady at sub-4% and wage growth has moderated but is squarely in positive territory.
• A healthy job market supported a resilient consumer and helped drive consumer confidence to its highest level since the end of 2021.
• Elevated U.S. equity market valuations and limited market breadth leave markets susceptible to deviations from the ‘soft-landing’ playbook.
• At ~20x forward P/E for the S&P 500, forward returns will need to be powered by earnings growth vs. multiple expansion. So far, Q4 reports have been mixed with limited and low magnitude positive earnings surprises.
• Lower valuations and different index compositions abroad are supportive for international equity markets, although the prospect for multiple expansion is uncertain.
• China’s economic growth poses significant challenges for emerging markets in 2024 and heightened geopolitical risks will likely continue to affect capital flows throughout the year.
• The great reset in rates over the past 24 months has caused near-term pain but paves the way for longer-term gains in fixed income when rates moderate. Higher base rates and less rate volatility should result in smoother sailing.
• Still elevated yields but tight spreads support a more balanced positioning in fixed income with an orientation towards higher quality, more defensive assets.
• 2023 was a golden year for private credit with higher base rates and limited defaults. 2024 looks promising but falling base rates and the potential for stress emphasize the importance of manager selection.
• With cap rate headwinds abating, 2024 could be a more constructive year for private real estate assets, although challenges remain. Notably, sector divergences are still wide (ex. Office) and rent growth is slowing in many markets.

Economy

U.S. GDP growth surprised to the upside throughout 2023 and appears to be on solid footing entering 2024 based on a wide range of metrics. The unemployment rate remained at 3.7% in January, despite a spike in layoffs, due to broad-based job growth and marked its 24th consecutive month under the key Fed threshold of 4%. A robust labor market, along with a meaningful increase in real wages due to inflation continuing its downward trend, led to a surge in consumer sentiment compared to Q4 2023. Given the consumer driven nature of the U.S. economy, recent data supports a cautiously optimistic outlook for many on Wall Street, while evolving geopolitical risks and other potential vulnerabilities seem to be capping any irrational exuberance from retail investors. Going forward, all eyes will remain on the Fed, key interest rates, and the path of inflation.

Globally, China will most likely lead headlines throughout 2024 as its economy grapples with several challenges including a property crisis, deflation, and weak consumer confidence. The Chinese government has taken aggressive measures to keep the economy afloat, but investors would be prudent to monitor exposure as the situation continues to evolve. Elsewhere, growth projections for India remain high, with Goldman Sachs recently predicting it will grow into the world’s second largest economy.

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