Monthly Market Pulse: January

Market

MACRO & MARKET VIEWS

Growth

We continue to see limited recession risk in the coming year and expect several tailwinds to global growth, including strong real household income growth, a smaller drag from monetary and fiscal tightening, a recovery in manufacturing activity, and a more dovish approach from central banks.

Inflation

Inflation progress is in store for 2024 as labor markets rebalance and goods, services, and shelter price categories normalize further. In Europe, despite elevated wage growth, weakening consumer demand may reduce cost pass-through and therefore ease services price pressures. With that said, higher energy prices remain a key risk.

Monetary Policy

Global inflation rates have continued to decline, and we now expect earlier and more aggressive interest rate cuts from several major DM central banks. Our colleagues in GIR expect 125 bps of rate cuts to be delivered by the Fed in 2024, beginning in March. The ECB and BoE should follow soon after, delivering a faster pace of cuts given even lower inflation and materially weaker growth, in our view.

Elections

2024 will feature 40 national elections, with more than 40% of the world’s population and global GDP participating. This political landscape may introduce a fresh element of instability into a world already grappling with heightened geopolitical uncertainty.

DM Equity

As inflation has slowed and central banks have turned more dovish, interest rate relief may support higher valuations and stronger corporate profitability. Still, a bottom-up, micro focus seems appropriate as higher interest rates relative to last cycle may expose vulnerable companies across various sectors, capitalizations, and styles. We view Japan as unique as the BoJ may begin hiking in 2024, though we see this shift to macro normalcy as a tailwind for Japanese equities.

EM Equities

Two catalysts which may aid performance in 2024 are 1) policy easing by EM central banks and 2) China’s ongoing recovery. China’s recovery has been lackluster, but a focus by the PBoC to revive economic growth may boost consumption. Additionally, supply chain diversification may create opportunities in other parts of Asia and LatAm.

Rates

We view sovereign bonds as attractive, despite our view that rates will settle lower than initially anticipated. We expect government bonds to provide strong total returns next year and favor extending duration as longer-dated fixed income has historically outperformed cash during central bank pauses.

Credit

The credit outlook is relatively stable, in our view. A healthy private sector has supported issuer quality, while declining cash yields may increase the relative attractiveness of corporate credit. We find IG credit attractive and prefer up-in-quality positioning in high yield as we move past peak credit quality and financing costs increase.

Currencies

The US dollar has remained highly valued. While global economies entering a better balance may weigh on the dollar’s valuation over time, stronger growth and higher yields in the US may raise the hurdle for a contending currency to emerge in the near-term.

Commodities

Barring any geopolitical catalysts, we expect the price of oil to remain rangebound throughout 2024. Strong demand on receding global recession fears and structural constraint from OPEC+ may offset weak activity data in China and higher supply in the US.

2023: Year in Review

Calendar year 2023 exceeded consensus expectations across many economic and market measures. The risk of a global recession was top of mind for many investors throughout the majority of the year. Yet, major central banks concluded their respective hiking cycles as economies experienced strong disinflation, all while labor markets and global growth remained resilient. As 2023 comes to a close, we summarize what was an eventful past year before looking ahead to 2024.

Source: Bloomberg, Business Insider, Bipartisan Policy Center, Time Magazine, United Nations Department of Economic and Social Affairs, National Public Radio, Goldman Sachs Global Investment Research, and Goldman Sachs Asset Management. As of December 19, 2023. For illustrative purposes only. Any reference to a specific company or security does not constitute a recommendation to buy, sell, hold or directly invest in the company or its securities. Past performance does not predict future returns and does not guarantee future results, which may vary.