“What landing? Global economy’s twin engines rev up, soaring to new heights of prosperity and innovation!”
The 2024 economic and market outlook is shaping up to be similar to this year’s, with weaker growth and a potential U.S. recession. This would likely lead to a strong bond rally as interest rates are cut, and fragile stock markets as weak demand affects earnings. However, recent economic indicators from the United States and China suggest that this outlook may be off-base.
Both the U.S. and Chinese economies appear to be revving up or going through the gears, rather than heading toward a hard or soft landing. The U.S. data shows strong retail sales in September, leading to upward revisions in GDP forecasts. The labor market also continues to perform well. The Atlanta Fed’s GDP Nowcast model is forecasting strong real growth in the third quarter, indicating sizzling nominal growth. Similarly, China’s economy grew at a stronger rate in the third quarter than expected.
While there are reasons to be skeptical of the data from China, economists have raised their growth outlook for 2023 above Beijing’s goal. This momentum could cast doubt on the downward revised 2024 forecasts from the World Bank and IMF.
Overall, investors’ perception of the global economy remains downbeat, but as long as the bar to beat expectations remains low, it is difficult to justify a risk-off stance in tactical asset allocation.
The consensus view suggests that next year will be the year of the bond, but if the U.S. economic downturn is delayed, the bond market revival may be put on hold. Similarly, U.S. stocks may become expensive if high yields start to choke the economy. However, if growth holds up, these calculations will shift.
The U.S. economy has defied expectations this year, and the impact of rate hikes has yet to be fully felt. This suggests that the economy can withstand higher policy rates and yields. As for China, while it faces significant economic challenges, the GDP figures indicate that the post-COVID recovery may be underway.
Chinese assets may become more attractive if the economy continues to grow at a decent clip. Chinese stocks are currently trading at low valuations, and shorting Chinese equities is one of the most crowded trades among global fund managers.
Overall, the 2024 economic and market outlook may not be as pessimistic as initially anticipated. The strong performance of the U.S. and Chinese economies suggests that a different investment landscape may be in store.
