Sof Landing? Hard Landing? Or No Landing?
Will the elusive soft landing happen? It depends on who you ask, as economic growth forecasts range from weak to strong.
Analysts at Bank of America Securities believe a soft landing is the most likely outcome. They expected growth to remain positive throughout the year, with annual GDP ending up with an increase of 1.4%.
Savita Subramanian, head of U.S. equity and quantitative strategy at Bank of America, wrote: “American companies and consumers are actually in a better position for a higher interest rate environment than they have been in many decades.”
Wells Fargo analysts predicted an economic slowdown in early 2024 before the economy recovers later in the year, leading to a 0.7% increase in the annual GDP.
The Commonwealth Financial Network anticipated a much faster expansion, forecasting an annual GDP growth rate of 3.75%.
The Commonwealth Network wrote in its forecasts: “We expect a Goldilocks economy – one that delivers full employment, economic stability, and declining inflation.”
However, not everyone believes GDP will finish the year positively. Vanguard analysts see overall GDP growth declining to 0.5%, with negative quarters in the second half of the year.
Spending is Likely to Drive the Economy
Economic analysts pointed to various trends that should help drive economic growth, particularly the sustained strength of the consumer. Consumers will continue to spend in 2024, but at a slower pace, according to Bank of America.
Michael Gapin, head of economics at Bank of America, said: “We see continued consumption growth. It constitutes two-thirds of GDP, and that’s what helps keep the economy out of recession.”
Gapin added that a slowdown is expected in the non-consumer sector, especially in business spending and manufacturing.
However, LPL Financial painted a different picture for 2024, where rising debt would deplete consumer savings, leading to the end of consumer spending that helped push the economy forward in 2023.
LPL Financial wrote: “We expect the consumer spending boom to come to an end.”
Interest Rate Cuts Ahead
While Vanguard analysts do not believe the economy can avoid a slowdown, they see positive developments for the economy in 2024. Specifically, they believe a higher interest rate environment will help restore some stability to lending.
Joseph Davis, chief global economist at Vanguard, said on a call with investors: “Return to sound money is the best market development in 15 years.”
Others expect the Federal Reserve to begin cutting interest rates in 2024, but gradually. Wells Fargo, the Commonwealth Network, and Comerica all forecast a 75 basis point reduction in the federal funds rate, bringing rates down to the 4.75% to 5% range.
Vanguard, which anticipates slower growth, forecasted sharper cuts to around 3.5% to 4%.
A Big Year for Bonds
Vanguard stated that rising interest rates over the past year have provided the best economic development for long-term investors in two decades.
Davis said: “Bonds are back, for sure.”
Vanguard raised its forecasts for inflation-adjusted U.S. bond yields to between 4.8% to 5.8% over the next decade, compared to its previous forecasts of between 1.5% to 2.5% before the rate-hiking cycle.
LPL Financial believes government bond yields may remain elevated in the near term before declining when rates are cut, offering “attractive value.”
Markets Expected to Fall and Recover
Many forecasts indicate volatility in the stock market throughout the year, as analysts see similar paths for the S&P 500 index.
Targets aimed at
LPL Financial forecasts the S&P 500 at 4,875 by the end of the year. The Commonwealth’s midpoint target was 4,750, which is consistent with Comerica’s analysis. Wells Fargo predicted that markets would decline and recover in 2024, with the S&P 500 reaching a midpoint target of 4,700.
Gary Schlossberg, the global strategist at Wells Fargo Investment Institute, said: “We expect the stock market to face some hurdles, more from the economy rather than interest rates, and then to surpass that before the economy turns, as it usually does.”
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