7 Market, Economic Predictions for 2024: Schwab

2. The Fed will cut rates three times in 2024.

While the financial markets are pricing in six Fed rate cuts starting in March, Schwab is “penciling in” three rate cuts of 25 basis points each next year starting in May, although a case could be made the cuts could commence in March, said Jones.

The fixed income strategist expects to see more volatility and gyrations in the bond market in 2024, but “overall rates should continue to trend downward,” she said.

3. The market is not pricing in a downturn.

“It makes a difference whether Fed's rate cuts next year are intended to stem a significant deterioration in the economy or the labor market versus just acknowledging the move down in inflation, according to Sonders.

“I think any cuts that would happen to stave off a coming serious recession, I don’t think that’s priced into market expectations,” she said.

4. Stocks will follow the bond market.

“The bond market to some degree is still in the driver’s seat for the equity market,” said Sonders. The move in yields “will continue to be a very important factor in driving what stocks do. Continued deceleration in yields and/or less volatility and just a calming in that market is probably a best case scenario for equities.”

Another significant plunge in yields, particularly if driven by more significant weakness in the economy, Sonders added, is “probably not the best ingredient for the recipe for continued move higher in equities.”

5. A soft landing looks possible.

Inflation has “already cooled off more quickly than the Fed and the markets expected” and it looks like those trends will continue, according to Jones.

Housing costs are a key factor, she noted.

“We do know from real-life indicators that rents are falling in many, many markets, so that should work its way through. And I’ve never been in the camp that said inflation will be sticky, or certainly that the last mile will be a lot harder than the previous couple of miles, simply because the momentum’s on the down side,” said Jones. “As the policy tightening to date works its way through the economy, there’s not a lot of reason to expect it to turn around and go back the other way,” she said. “The trend is towards lower inflation and not towards higher inflation.”

As for hitting the Fed’s 2% inflation target without a recession: “So far so good on the soft landing.”

6. ‘Zombie’ companies could face a credit crunch.

Many consumers and companies have avoided harm from higher interest rates because they were able to lock in ultralow rates before the Fed started its tightening actions, Sonders noted.

Next year may prove challenging, however, for companies without the wherewithal to tap the credit markets, she suggested.

“There are a lot of companies that have debt maturities next year. It’s a big year for maturities, as is 2025, and for the less well-capitalized companies, many of which are down the cap spectrum, the zombie type companies that don’t have sufficient cash flow to pay interest on debt, and if the rollover is at higher yield, I think it becomes a problem for many companies,” she said.

“In the aggregate, however, this is not as big a problem as would have been the case if there was much more variability, and so many factions within the economy had not taken advantage of the zero-interest-rate environment that we were in, which has been a benefit to things like corporate earnings and the equity market.”

7. 2024 will be a good year for international stocks.

International stocks have been a hard sell for advisors because the equities have underperformed for a decade and clients have pushed back, Kleintop told ThinkAdvisor in an interview in early December.

But the average international stock outperformed the average U.S. stock in every sector this year, according to Kleintop, who expects international stock ownership to pay off in 2024.

“I think that what we’re seeing is a broader shift toward international outperformance,” he said.

Most advisors use cap-weighed ETFs or mutual funds, which outperformed because of the “Magnificent 7” tech stocks that drove the U.S. stock market this year, he noted, adding that more active management or equal-weighted approaches would have seen international outperformance in 2023.

Next year even passive international funds should outperform, Kleintop added.