Frédérique Carrier, head of investment strategy in the British Isles and Asia at RBC Wealth Management, examines the challenges and opportunities facing markets and asset classes in 2024 in the US, UK, Europe, Asia and Canada. She also shares RBC Wealth Management’s recommendations given the new market reality.
Whether the US economy will finally tip into recession and with
the return of bonds as an attractive complement to stocks in a
portfolio, investors have much to look at this year, according to
Frédérique Carrier, head of investment strategy in the British
Isles and Asia at RBC Wealth
Management.
Carrier thinks that a US recession is the most probable outcome
in the coming quarters. In the past, the combination of high
interest rates and restrictive bank lending standards – which is
what is in place today – has been a recipe for recession. “Soft
landings, on the other hand, have historically featured rising
interest rates but no overt tightening of lending standards. The
presence of similar conditions, such as high rates and
restrictive lending, is already taking a toll in Canada, the UK,
and the eurozone,” Carrier said.
“However, it could be that the big, decisive shifts in fiscal and
monetary policy over the past few years continue to have
lingering effects on the course of the US economy, and that
instead of a decline in GDP, growth is merely on the slow side in
2024,” Carrier added. “Regardless of the outcome, the
economic headwinds which have been gathering will likely run
their course and probably fully dissipate later in the
year.”
That could be enough to keep S&P 500 earnings growing. She
believes that any growth in earnings would leave room for share
prices to advance between now and the end of 2024, even if the
path for getting there is uncertain.
Carrier recommends a market weight position in global equities,
but believes that investors should consider limiting individual
stock selections to high-quality businesses, namely those with
resilient balance sheets, sustainable dividends, and business
models that are not intensely sensitive to the economic cycle.
Portfolios that have held their value to a better-than-average
degree will be best equipped to take advantage of the
opportunities that are bound to present themselves when a
stronger pace of economic growth reasserts itself.
“The stock market will need to adjust to the new competition from
bonds for investment dollars. For the first time in more than a
decade, bond yields have moved back up to levels that make fixed
income a fully useable and attractive adjunct to equities in a
balanced portfolio. Bonds provide, as they have traditionally
done, a combination of reduced volatility, more predictable
returns, and the comfort of a maturity value,” Carrier
said. “If at some point a more defensive structuring for a
balanced portfolio is called for, having bonds as a reasonable
alternative for an investor looking to take some risk out is a
welcome development.”
US
US equities face an unusually high number of crosscurrents in
2024, according to Carrier. There is a wide range of potential
economic outcomes possible. The market seems positioned for a
rosy scenario. Industry analysts’ S&P 500 consensus earnings
forecast of $244 per share in 2024 represents 11.1 per cent
year-over-year growth. This forecast, combined with the market’s
19.3x above-average price-to-earnings ratio, leaves little wiggle
room for economic disappointments.
The US presidential election will inevitably generate noise.
Investors should remember that since 1928, the S&P 500 rose
7.5 per cent on average during presidential election years and
ended the year in positive territory almost 75 per cent of the
time. Carrier believes that Fed policy and the economic
cycle play greater roles in shaping market returns than political
party control in Washington.
Overall, she thinks S&P 500 returns for the next 12 to 18
months will largely depend on whether a US recession
materialises. But even if one does and the stock market corrects,
the market typically will establish a new uptrend parthway
through the recession period.
To start the year, Carrier recommends maintaining US equities at
the market weight level to take advantage of the distinct
possibility of the S&P 500 reaching new all-time highs in the
coming few months. This allocation is also intended to balance
the risk of a recession against the possibility that one may be
averted.
Carrier believes that investors…
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