Russell Investments: Over-pessimism has become over-optimism

December 6, 2023

Elevated recession risks are expected 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, today. ‘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. This means the Fed 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 US economy has achieved a soft-landing but this could be a waypoint on the path to a mild recession later in 2024.’

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,’ he continued. ‘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.’

Key asset-class views for 2024 according to him include:

• ‘Government bonds offer attractive value as yields trade well above expected inflation.
• 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 US 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.
• We are neutral on emerging markets despite their relative cheapness due to negative sentiment.’