2024 will likely present many challenges for the U.S. economy as resilience wanes amid rising household debt and job cuts. However, slowing growth could finally put an end to stubborn inflation pressures and open the door to gradual policy easing towards the middle of the year. Investors should prepare for volatility, but also be ready to potentially capitalize on a unique opportunity set in the year ahead.

Federal Reserve policy rates path
Fed funds rate and projections

Line graph

Source: Federal Reserve, Bloomberg, Principal Asset Management. Data as of November 22, 2023.

2024 will likely present a challenging story for investors as economic resilience begins to fade. Post-pandemic excess savings are almost exhausted, while fixed-rate loans locked in at low rates are expiring, opening the door for a sharp rise in household debt servicing costs. Labor market cracks are starting to show as a growing number of firms announce headcount reductions and take a more cautious tone to expense discussions.

Yet, investors should also be encouraged that the slowing growth environment could drain out the most stubborn of inflationary pressures, opening the door to gradual policy easing in mid-2024 and reducing the discomfort that has plagued markets since rate liftoff last March.

The year ahead will likely present a greater opportunity set than has been available in many years:

  • The recent market pullback in several sectors and smaller cap sizes means cheaper valuations (providing investors with important opportunities to gain exposure to secular tailwinds).
  • The approaching end to monetary tightening will open the door to a new cycle of equity gains.
  • Higher bond yields imply greater volatility and lower long-term growth.
  • Higher rates indicate that bonds can finally be more than a diversification tool—the "income" is back in fixed income. 2024 will be the year of the pause and the pivot. Investors should prepare for near-term volatility but also actively position for relief, stabilization, and recovery once global central banks start to cut rates.

For more insights highlighting the themes that will impact portfolios and drive market performance in the year ahead, read 2024 Perspectives: The year of the pause and the pivot.


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