Market Watchers See Return to ‘Normal’ in ’24

Even some of the most respected market forecasters had a tough time navigating 2023. Next year looks to be a bit more predictable, according to recent market and economic outlooks from large asset managers and investment advisories.

If the prognosticators’ outlooks come true, it will mean a more stable ride for defined contribution retirement plan investments—though not necessarily one of growth. But while stock and bond projections are mixed, the analysts all had one theme in common: They’re certain there will be less uncertainty.

“In 2024, we believe markets will make a definitive turn to a more recognizable place,” wrote LPL Financial in its report, “Outlook 2024: A Turning Point.”

“Sound money—the persistence of positive real estate rates—provides a solid foundation for long-term risk-adjusted returns,” wrote the Vanguard Group, the country’s largest target-date-fund provider by assets. “We expect return outcomes for diversified investors to be more balanced.”

The Bank of America Corp. dubbed next year “The Year of the Landing,” predicting that the rate hikes both in the U.S. and Europe would finally take hold to create a “soft landing,” but not a recession.

The Goldman Sachs Group summed things up in its economic outlook headline, which reads: “Macro Outlook 2024: The Hard Part Is Over.”

401(k) plans in the U.S. held $6.6 trillion in investment assets as of the end of 2022, according to data from the Investment Company Institute and BrightScope, which, like PLANADVISER, is owned by ISS STOXX.

Mutual funds accounted for 40% of investments in 401(k) plans; collective investment trusts, savings vehicles designed specifically for pooled plans, made up 38% as of 2020, the latest data available. The remaining assets were held in other types of investments such as separate accounts or individual stocks and bonds.

60/40 Outlook

The analysts were more mixed on their views for market growth across sectors next year.

LPL came out on the slightly more tepid side, saying it is not yet ready to lower the recession flag that many have been waving since the start of 2023. The firm wrote that “risk of a recession is bubbling up again as the effect of [the] post-pandemic stimulus wanes.”

For stocks, LPL sees interest rate stabilization, along with an expected ease in rates, bringing “mid-to-high single-digit returns in 2024.” Risks to equity markets, the firm noted, are in the form of widening conflict in the Middle East and Europe, an increase in U.S.-China tensions, and an uptick in inflation that keeps the Fed raising rates.

For bonds, the firm sees “compelling value,” with yields likely to have peaked this year and with potential to come down in 2024.

Good News Bonds

“Bonds are back!” Vanguard declared in its outlook, signaling a long-term growth trajectory for the fixed-income investments that are the backbone of many retirement plan portfolios.

“Despite the potential for near-term volatility, we believe this rise in interest rates is the single best economic and financial development in 20 years for long-term investors,” the analysts wrote. “Our bond return expectations have increased substantially.”

The asset manager is predicting U.S. bonds to return a nominal annualized 4.8% through 5.8% over the next 10 years, compared with a prior expectation of 1.5% through 2.5% before the rate-hiking began. If played correctly, according to Vanguard, long-term investors can come out OK despite the recent volatility.

“If reinvested, the income component of bond returns at this level of rates will eventually more than offset the capital losses experienced over the [past] two years,” the firm wrote. “By the end of the decade, bond portfolio values are expected to be higher than if rates had not increased in the first place.”

The asset manager is less bullish on equities and observed that the higher-rate environment has depressed asset-price valuations while also squeezing profit margins, as issuing and refinancing debt is more expensive. With that outlook, the firm downgraded its U.S. equity return expectations to an annualized 4.2% to 6.2% over the next 10 years from a prior prediction of 4.4% to 6.4% going into 2023.

Overall, however, the firm sees a stronger case for the traditional 60% equities and 40% fixed-income savings portfolio.

“The case for the 60/40 portfolio has strengthened,” Vanguard wrote. “For long-term investors in balanced portfolios, the probability of achieving a 10-year annualized return of at least 7%, the post-1990 average, has risen from 8% in 2021 to 40% today.”

Escape to Safety

Goldman, for its part, came in with positive notes on the overall economic picture.

The firm’s analysts discussed the movement away from the not-so-distant fears of “secular stagnation” when inflation and interest rates were both low. The firm wrote that 2024 should “cement the notion” that the global economy has escaped the post-global financial crisis environment of low inflation, zero policy rates and negative real yields.

“For all the handwringing about post-COVID policy excesses and the reemergence of inflation, that policy response has allowed asset markets to escape,” the analysts wrote. “Policy rates are firmly positive in most places, real yields have moved to pre-GFC level along the curve, and deflationary risks seem remote.”

While the firm is forecasting positive returns across equities, bonds and credit, it expressed caution about the relatively high valuation of these investments.

“The main challenge to our benign baseline economic forecast is that valuations on many risk assets are richer than normal,” Goldman wrote. “Although our economic growth forecasts are well above consensus, the gap to market pricing generally seems smaller. For credit and EM [emerging market] rates, tight spreads limit the potential outperformance versus risk-free rates, while for equities, valuation constraints remain in focus.”

The firm did note that, while “US equity valuations do look richer than normal,” in many cases the valuation concerns are “narrower than sometimes presented.”

Mixed View

For Bank of America’s part, strategists were relatively optimistic on equities, forecasting the S&P 500 to end 2024 at an all-time high of 5,000.

That outlook, the bank wrote, is “not because the Fed is expected to begin cutting rates next year, but because of what the Fed has already done and how corporates have adapted.”

Its analysts were less optimistic on Treasury yields and noted they are “not as bullish as consensus on 10-year bond prices.” Their reasoning: The “U.S. fiscal stance has deteriorated, as has its net international investment position, and duration/inflation risk has become riskier.”

In a statement with its report, Bank of America’s head of global research, Candace Browning, signaled once again the theme of more normalized markets.

“2023 defied almost everyone’s expectations: recessions that never came, rate cuts that didn’t materialize, bond markets that didn’t bounce, except in short-lived, vicious spurts, and rising equities that pained most investors who remained cautiously underweight,” she said. “We expect 2024 to be the year when central banks can successfully orchestrate a soft landing, though recognize that downside risks may outnumber the upside ones.”