A Solid Investment Pick for 2024 as Forecasters Scratch Their Heads

What You Need to Know

The direction of interest rates, markets and the economy are unclear as 2024 market outlooks pour in.
Against that backdrop, focusing on quality is a solid move for investors, according to analysts at UBS and elsewhere.
Jeremy Grantham’s GMO considers quality a third style, alongside growth and value.

This is the first in a series of new columns about portfolio strategies and planning.

The flurry of market predictions that pour in from Thanksgiving to New Year’s are starting to arrive, with visions of 2024 interest rate cuts and stock gains, and maybe a mild recession, likely to dance across many strategists’ headlines in the coming days and weeks.

Uncertainty has been a keyword for markets and the economy since the pandemic, though, and investors hoping to plot a course for next year based on analysts’ forecasts and Federal Reserve tea leaves may find it difficult to sift through differing views on what might happen and when.

Will there be a soft landing? No landing? More interest rate hikes to rein in stubborn inflation? Long-awaited rate cuts to signal a clear end to the Federal Reserve’s aggressive, inflation-fighting policies?

While financial advisors and clients indeed could find the right forecast to align with their own instincts and insights, or pull their hair out trying to figure when the macroeconomic environment will shift, some strategists suggest another tack: Focusing on high-quality investments.

UBS’s chief investment office, for example, says investors shouldn’t expect the U.S. economic and interest-rate path to be smooth in 2024.

“We agree with the market’s assessment that U.S. growth, inflation and rates will all head lower next year — but our view on the timing and size of U.S. rate cuts differs to the market, with potential for uncertainty and market volatility,” Solita Marcelli, chief investment officer Americas, UBS Global Wealth Management, and colleagues wrote in a research note this week.

“So, we believe investors should focus on quality. In fixed income, quality bonds offer attractive yields and should deliver capital appreciation if interest rate expectations decline as we expect. In equities, quality companies with strong balance sheets and high profitability, including those in the technology sector, should be best positioned to generate earnings in an environment of weaker growth.”

The outlook for U.S. interest rates in 2024 remains a crucial driver of asset markets now, the UBS team said, noting that dovish comments this week from a typically hawkish Fed governor caused the markets to nearly double their estimates for a rate cut as soon as March and helped drive down 2-year U.S. Treasury yields.

Growing market confidence that the Fed has tamed inflation and will be able to cut borrowing costs earlier than expected also has driven the S&P 500 index to near its year-to-date high, UBS suggests. But the firm noted other Fed officials have remained cautious in their approach, with at least one signaling the central bank will need to raise rates again to press inflation to its 2% target.

U.S. economic data continues to send mixed signals, UBS notes, cautioning that the Fed’s data dependency and diverse opinions could translate into more changes in rate expectations and therefore more market volatility in this year’s closing weeks.