2024 Global Market Outlook: Russell Investments’ strategists warn against over-optimism in 2024

Russell Investments’ strategists expect elevated recession risks for 2024 and headwinds for equity markets, but a more positive environment for government bonds.

“We expect 2024 will be the transition year that the industry consensus anticipated for 2023,” said Andrew Pease, Chief Investment Strategist at Russell Investments. “The over-pessimism about 2023 has become over-optimism for 2024. We are in a twilight zone between slowdown, possible recession and recovery, where nothing is likely to be quite what it seems.”

Slowing jobs growth and declining inflation at year-end 2023 offer signs the economy has begun to cool, which Pease believes means the U.S. Federal Reserve has probably finished lifting interest rates and may contemplate easing during the first half of 2024. It also means markets are entering a period of heightened uncertainty as investors debate whether recession can be avoided.

“It may appear for a time that the U.S. economy has achieved a soft-landing, but this could be a waypoint on the path to a mild recession later in 2024,” Pease said.

Russell Investments’ 2024 outlook report also explains why government bonds are likely to re-establish their role as effective diversifiers for multi-asset portfolios and prompt a comeback for the traditional 60/40 investment portfolio.

In contrast, the team believes the era of big fiscal expansions is over as politicians across the world become constrained by the realities of debt burdens and interest costs. “There will be less ability to respond to the next economic downturn with fiscal support,” Pease said. “There is a risk that central banks will be forced to accommodate inflation above their targets, but as we learned in 2023, inflation is unpopular with voters. The bond market bullies are back.”

Russell Investments strategists’ key asset-class views for 2024 include:

• Government bonds offer attractive value as yields trade well above expected inflation. “Recent 10-year U.S. treasury yields around 4.5% offer good value and recession risks should provide cycle support for bond returns,” Pease said. He added that yields should decline as recession risk looms, and the team has a target of 3.5% for the U.S. 10-year Treasury yield by the end of 2024.
  
  
• Equities have limited upside with expensive valuation and recession risk on the horizon.
  
  
• The Quality factor is the team’s preferred exposure within the equity market.
  
  
• The U.S. dollar could weaken early in the year on soft-landing hopes but strengthen later in the year if recession fears take hold.
  
  
• High yield and investment grade spreads are uncomfortably tight for an environment of elevated economic uncertainty, leading the strategists to dampen their typical strategic overweight to corporate credit.
  
  
• The team is neutral on emerging markets despite their relative cheapness due to negative sentiment. Regarding structural changes facing the Chinese economy, the team needs to see extremely oversold conditions before overweighting the market.

“As we look toward 2024, we see select opportunities within asset classes to build a slightly cautious stance in portfolios,” Pease said.