by Brian Levitt, Global Market Strategist, Invesco
Will inflation come under control before the economy deteriorates? When will central banks start cutting rates? Kristina Hooper, Chief Global Market Strategist, and Alessio de Longis, Head of Investments for Invesco Investment Solutions, joined us for an episode of Market Conversations to discuss Invesco’s 2024 Investment Outlook. We asked them the top questions investors have on their mind heading into the new year.
What can investors expect in 2024?
Kristina Hooper: It's about the lagged effects of monetary policy at the end of the day. There's much more to be seen in terms of the impact that rate hikes have had, both good and bad. So we're likely, very likely, to continue to see significant disinflation, but it comes at a cost. So as we look ahead to 2024, we think of this as a balancing act, right? Will inflation get under control faster than the economy deteriorates? And that is the very significant balancing act. So hopefully, in a few months, consumers will feel better, because we'll have made more progress on disinflation, but we won't have had a very significant impact in terms of depressing economic growth.
Alessio de Longis: We are in a cycle that is already somewhat extended and accelerated because of the policy response to COVID. For investors, this is not a (time to) close your eyes and forget your investment strategy. Investors need to reassess and evaluate how monetary policy is impacting the economy. We have a long way to go on that. And given the geopolitical risks that are real and alive, investors need to maintain basically a fluid approach to analyzing the situation. And if the facts change, be prepared to change their investment posture.
What about that much-anticipated US recession that was expected in 2023?
Alessio de Longis: Well, I think what happened is exactly the super important element that Kristina just highlighted, the balancing act between inflation and unemployment, right? Unemployment is at all-time lows. You don't have a recession. Obviously, unemployment is a lagging indicator, but even the leading indicator of unemployment are suggesting, if anything, a moderate rise in unemployment that would be perfectly consistent with that Goldilocks scenario that Kristina has outlined — where inflation comes down faster than the unemployment rate rises, growth remains good enough, not too hot, which is exactly the perfect development for monetary policy.
Could the Federal Reserve lower interest rates in 2024?
Kristina Hooper: We anticipate that rate cuts would begin by the end of the first half of '24. Now, this will be dictated very much by the data we see going forward, but from where we sit today, we think that's very likely.
All we have to do is look at the December 2021 dot plot and the expectations for the Fed funds rate at the end of 2022 to know that. And so, clearly, markets have been going through this repricing process. I think, in particular, what we've seen is that recently with the CPI (Consumer Price Index) print for October, there is this great realization that, in fact, the July rate hike was the last one.
If rates are cut, what could it mean for investors?
Kristina Hooper: Those rates will come down and investors will move their money. What we have seen is very mobile money over the last few years. They might as well have sneakers on them because they've moved. They've moved out of traditional bank accounts into high yielding accounts, and they are poised to move, in my opinion, in a significant way.
How could the 2024 US election affect markets?
Kristina Hooper: I don't think elections matter. Certainly, not in a material way over more than the very short term. Certainly, we can see short-term gyrations as a result, but I don't think it really matters in the medium or longer term. Now, geopolitical issues, they can have a bigger impact, although again, very much in the shorter term, in my opinion. We always have to ask ourselves, is it contained or is it contagious?
Alessio de Longis: I agree with Kristina. We mentioned earlier, oil prices as being a real time barometer to determine when a regional problem becomes a global systemic problem. Oil prices is a very simple way to think about that transmission mechanism that affects everyone. But Kristina said something important earlier on monetary policy and recessions, which applies also here with geopolitics.
Alessio de Longis: So once an election outcome is clear, going back to the drawing board and understanding what are the economic policies that come with that election outcome, now you can go back to a sound investment process and determine what the impact on the market is. So, you don't position ahead of an election. But as investors, we need to understand once the election outcome is certain, what are the economic policy implications, if any, and have they changed?
For more insights, read the 2024 Investment Outlook and listen to the full podcast below:
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