Advisor Flipbooks

2024 SEI ® Data as of 12/31/2023 unless otherwise indicated. 16 If we are correct, central banks might not be able to cut interest rates as much as markets are expecting and bond yields are not likely to fall much from here. That would be a problem for equities, but it also would likely be a problem for fixed-income markets. A 10-year Treasury note yield that fluctuates in the 4%-to-5% range seems more likely than a sustained downward shift into the 3%-to-4% area. Credit spreads also are very tight and could be expected to widen in a recessionary environment, perhaps less so in a stagflationary scenario, where economic growth slows but the inflation outlook becomes a greater concern once again. Broad diversification across styles and asset classes is the best way to hedge against the unusually uncertain outcomes facing investors in 2024. A summary of our views The U.S. economy remains relatively healthy in the near-term, especially versus other major advanced countries. Financial conditions are more consistent with continued economic expansion, at least through the first half of 2024. Other major countries are expected to continue on a slow-growth/mildly recessionary path. Labor markets are still tight across the major economies, although there are emerging signs of weakness. SEI does not expect a big rise in unemployment, so we are doubtful that wage pressures will subside to levels that are consistent with central banks' mandated inflation targets. Inflation is far from dead, in our opinion. The benign trend observed in recent months is more reflective of normalizing supply chains and the sharp downturn in energy prices in 2023. Underlying cost pressures stemming from higher compensation rates, financing costs, taxes, a move away from China, and the costs of reducing carbon emissions are not likely to fade. We think that financial markets are probably pricing in too many policy-rate cuts, especially in the U.S. Although both the BOE and the ECB are rhetorically more aggressive than the Fed, their relatively weaker economies may lead to sharper interest-rate declines in 2024 than actually achieved by the U.S. central bank. Fiscal policies are generally quite expansionary. There may be some reduction in government deficit financing as COVID and energy-relief measures disappear. But spending is on automatic pilot in the U.S., and the U.K. has engineered election-year tax cuts. Rapidly rising old-age entitlement expenditures, higher interest expense, a ramp-up in military spending and the long tail of spending programs (semiconductors, infrastructure, green initiatives) will keep government expenditures at generally high levels for the foreseeable future. Geopolitical risks remain a concern, but their impact on markets is difficult to forecast. The Israeli-Hamas war still has the potential to escalate, leading to a spike in energy prices. The coming year has a heavy election calendar. The U.S. presidential election could be a source of market instability, but the real impact will be felt by those companies and industries that will be perceived as the winners and losers of a particular outcome. Investor sentiment is currently enthusiastic over the prospect of a soft economic landing and a return to 2% inflation. Both bonds and stocks appear overbought on a near-term basis, so some kind of price consolidation would not be surprising. The extent of any correction in risk assets will, of course, depend on changing perceptions regarding economic growth, the corporate-profits outlook, the path of inflation, and central-bank responses.

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