Wall street’s 2024 predictions and what they mean for your portfolio

• Experts are predicting that inflation and the economy will both land… softly, with no major recession in sight.

• They’re expecting positive but not overwhelming returns for both stocks and bonds, and are recommending high-quality assets above all others.

• They’re also positive on stocks from some emerging markets, gold, and the Japanese yen.

Some people read A Christmas Carol every December. Others, like me, read stacks of economic outlook reports – some from the most influential global banking giants and some from smaller, lesser-known investment houses. And when you read a lot of them, you can get a pretty good sense of what the investing world sees coming. Let’s take a look…

The vibe is “cautious optimism”.

Most firms are stepping lightly into 2024. They’re hopeful overall, but they do expect to see some economic challenges. Generally, that means moderate growth and a potential risk of a (mild) recession, particularly in the first half of the year.Inflation has already come way down and firms expect it’ll continue to drift lower, though probably not hitting central banks’ 2% targets until later in the year. So many are expecting rate cuts to happen around then, as economies and inflation indicators stabilise. Put more simply, they’re predicting that inflation and the economy will both land… softly.That’s not to say they don’t see risks out there. The pros acknowledge the potential for heightened geopolitical tension, a harder-than-foreseen recession, and fallout from national elections around the world, including in the US. Plus, there are worries about the US government debt dynamics, which could sideswipe the US dollar and interest rates. And there’s the risk of a delayed impact from previous interest rate hikes and inflation dynamics globally. But these experts are mostly cheered by the fact that global economies have just emerged from a tricky time, and things are mostly becoming less-tricky.

Both stocks and bonds are generally expected to do pretty well.

Let’s call it positive, but not overwhelming. While some folk are peppier about stocks and others about bonds, there’s generally a consensus that investors should favor higher-quality assets in 2024, be it a stock or a bond.There’s definitely a cautious kind of optimism on Wall Street about stocks, in particular for companies that aren’t just surviving but thriving – think: strong fundamentals, robust earnings, and minimal debt. US tech stocks and Europe’s GRANOLA stocks could still be stars, even though their valuations are quite rich. Emerging market stocks, especially from across Asia, are drawing eyes for their growth potential, while small- and mid-cap stocks could be the dark horses in a recovering economy. But take US shares with a pinch of salt – their high valuations and optimistic earnings projections have some investors raising their eyebrows. The word on the street is that a balanced, quality-focused, and globally diversified approach is the way to go.Bonds are fueling a similar kind of hopefulness among the big players, with a tasty mix of income and the potential price gains that’d happen when the Federal Reserve (the Fed) begins to cut interest rates. The pros’ top advice is once again to favor high quality – we’re talking government bonds from the safest countries and top-tier, investment-grade corporate bonds: they should benefit most from falling interest rates and are better insulated against any default risk. For the bold and brave, emerging market debt and short-term high-yield bonds might be tempting, but remember, they come with their own set of challenges (like higher refinancing costs).

And there are a few other interesting views out there too.

Emerging market assets are drawing a lot of attention right now. The consensus is quite optimistic about Asia, which could benefit from a rebound in earnings and a weaker US dollar. Opportunities are also seen in India, Indonesia, Mexico, and Brazil, with a focus on sectors that will benefit from the green energy transition and other tech advances. But the gains here could be choppy, thanks to a still-fragile global economy and potential geopolitical risks. Likewise, most pros are taking a very cautious approach to China as the macroeconomic and government policy risks are still extremely high.There’s not a clear consensus about what the year will be like for commodities. The broadest consensus is for gold, which is seen as a solid portfolio diversifier and could reach new highs, thanks to renewed central bank purchases and geopolitical uncertainty. Industrial metals, meanwhile, could face volatility due to economic conditions, but their long-term prospects are generally seen as positive, especially for those linked to the energy transition. And although a lot of experts expect oil prices to remain high because of robust global demand, geopolitical risk, and supply dynamics, plenty of others disagree.On currencies, the pros are far more aligned in their views. The consensus is that the US dollar will weaken as the year progresses – thanks to a weakening but stable global economy and rate cuts by the Fed. This means other currencies might shine, but it’s not a one-size-fits-all story. The euro and the British pound are expected to have a rougher time, thanks to not-so-great economic fundamentals. But the Japanese yen could have a stellar year, as its government bond yields start to align more with other currencies. And don’t forget about the potential winners among emerging market currencies: they could get a leg up from a softer dollar and a still-kicking global economy.

What’s the opportunity, then?

The consensus for 2024 is a bit like vanilla ice cream: not thrilling, but hard to argue with. Higher interest rates might keep the economy on a low simmer, but if 2023 showed us anything, it’s that the economy’s got grit. Overall, then, you can’t go far wrong following the smart money’s bets on high-quality stocks and bonds, with a dash of emerging market shares and a pinch of commodities thrown in.Just don’t take this “consensus view” as gospel. The market’s known for throwing curveballs just when everyone’s nodding along in agreement – remember how the crowd got it spectacularly wrong in both 2022 (a bearish shock in a bullish room) and 2023 (a bull dance in a bear cave). That tells you something: when everyone’s singing the same lyrics (i.e. when the views of the herd are already baked into prices), any off-key note can send the tune in a new direction (i.e. wild price swings). So take note of what the consensus is saying, but keep an eye out for those market curveballs – both positive and negative. If you’re a more advanced investor, there’s a lot of money to be made by anticipating the shifts in the market narrative.My final thought here: don’t put all your eggs in one scenario basket. Make sure your portfolio is built to perform well in your most likely scenario – but can handle alternate ones too. That probably means owning not just stocks, but also bonds, gold and other commodities, and maybe even some higher-shelf cryptocurrencies. Holding some US dollars in a higher-yielding cash account is probably also not a terrible idea: after all, the greenback is the one asset that’s likely to perform well if everything else is crumbling. Plus, it’ll allow you to keep some powder dry so you can seize on the opportunities that will surely present themselves. As always, stay on your toes, be ready to zig when others zag, and – whether you’re a long-term investor or a shorter-term trader – make sure you’ve got a plan that’s well-thought-out and flexible.

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Capital at risk. Our analyst insights are for information purposes only.