U.S. Outlook: One Thing Leads to Another

Economic pain is likely in 2024, but that doesn’t mean stocks will struggle all year, especially if there is a continuation of the rolling recessions that have hit the economy.

"Don't fight the Fed" is a decades-old mantra. "Higher for longer" is a newer reference to Federal Reserve policy amid what has been the most aggressive monetary policy tightening cycle in more than 40 years. As we approach 2024, there has been no diminution in the recession vs. soft landing debates thanks to a cycle filled with cross-currents in terms of economic data and inflation. A key characteristic of 2023—one we feel will persist into 2024—is the inverse relationship between Treasury bond yields and stock prices.

The only full-blown correction (defined as a drop of at least 10%) in U.S. stocks so far in 2023 from late July to late October directly corresponded to the spike in the 10-year Treasury yield from below 4% to 5%. The ensuing recovery since then has some roots in the decline in yields; with the 10-year yield moving back down to below 4.5%, as of Friday's close. Looking at next year, we believe the best backdrop for the U.S. equity market would not necessarily be another significant plunge in yields—particularly if triggered by a significant weakening in economic growth—but instead less volatility/more stability in yields.