2024 Market Outlook: Are we heading into a recession or recovery? Why not both?

As we wave goodbye to 2023, we can also expect to bid adieu to some of the key events of the year that made it especially challenging for the markets. The central bank interest rate rises, which brought about a mini banking collapse early in the year, appear to have come to an end, while inflation is moving toward target levels. 


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As we look ahead to 2024, one concern from 2023 is likely to stay with us: the possibility of a recession. It’s important to remember that the 2020 recession was a once-in-a-lifetime event, and since then, the economic cycle has been anything but normal. It's only logical, then, to expect that any subsequent economic slowdown would also take a unique course, in keeping with these extraordinary times.

With that in mind, as 2023 comes to a close, we believe these six key themes will have big impacts on the markets throughout 2024:

Recessions come in all shapes and sizes

What we’re seeing play out in economies around the world could best be described as “rolling recessions”. As one sector recovers, another might face a slowdown. This “economic relay race” suggests that, while the economy certainly has challenges, it is ultimately resilient.

We believe data suggests that a U.S. recession is far less likely to happen in 2024 than 2023, and manufacturing and global trade are about to recover. And while Canada’s economy is weaker than the U.S.’s, our strong labour market should reduce the effects of any economic downturn.

We’re in a new labour demographic

Labour markets remain tight in many areas around the world. In the U.S., for example, there are more people leaving the workforce than entering it, a phenomenon we’re also seeing in countries across Europe and Asia.

While unemployment tends to increase during a recession (or after it’s taken hold), rather than before, the low levels of unemployment that we’re currently seeing can help to maintain consumer demand, which in turn can dampen the effects of a recession. 

Inflation and interest rates are normalizing

Inflation levels are half of where they were last year, which has allowed central banks to pause interest rate increases. However, we don’t expect interest rate cuts before the end of 2024 at the earliest.

High interest rates can be an advantage for fixed income investors: by the end of 2023, bond yields were at a level that hasn’t been seen in almost 20 years. The equity risk premium (ERP) suggests that bond returns are likely to compete with equity returns over the coming years.

S&P 500 valuations remain attractive

In the U.S., the “magnificent seven” — Amazon, Apple, Alphabet, Microsoft, Meta, NVIDIA and Tesla — contributed a disproportionate amount to the gains in the S&P 500 Index in 2023 (the index of the largest companies in the U.S.). Contributions from the seven helped the S&P 500 to see a significant increase in its overall value.

However, various sectors and companies within the S&P 500 didn’t see any growth at all, meaning that many of those companies currently have attractive valuations. This, combined with improved earnings driven by economic recovery and anticipated lower inflation, suggest positive equity gains in the mid-to-high single digits during 2024.

Geopolitical risks are likely to contribute to volatility

Aside from the continued uncertainty from conflicts in Eastern Europe and the Middle East, 2024 is also an election year in the U.S. These types of geopolitical risks can affect investor sentiment and lead to short-term market volatility.

However, volatility caused by political concerns has historically been quite short-lived — it rarely has a long-lasting or meaningful impact on financial markets, so it really pays for investors to focus on the long term.

What if it goes right?

Investment markets can often find themselves in the middle of a tug of war between positive and negative sentiment. Investors can often get stuck in one narrative from time to time, and that narrative is currently pessimistic, with so much focus on a potential recession that the positive economic signs are being ignored.

There is plenty that could go right: unemployment could stay low, prompting continued consumer spending growth; inflation could keep falling, leading to interest rate cuts; and manufacturing could rebound, boosting profits. This all leads us to a more optimistic view on the global economy and markets as we head into 2024. While there are definitely challenges ahead, we believe the data points to a general sense of improvement: and improvement brings opportunity.