Earlier this week, Goldman unveiled their macro outlook for 2024.
Suffice to say the bank’s optimistic about the odds of a soft landing. Growth, Jan Hatzius said, should be healthy and the so-called “last mile” in the disinflation process (e.g., from ~4% down to ~2%) will be perhaps easier than some economists believe.
The key point is that central banks won’t necessarily have to countenance, let alone engineer, a downturn to restore price stability. As Hatzius put it, there’s “just no need for a recession.”
As is tradition, the bank followed up with a piece detailing 10 core investment themes for the new year. This is an annual tradition. Goldman will proceed to release in-depth outlook pieces for individual assets next.
The “core themes” pieces are long (although mercifully not the laborious tomes favored by some other banks), but Goldman provides a bullet point summary at the outset, and a few summary bullet points within each section.
As a quick reminder: If it’s philosophical (or any other kind of) profundity you’re after, year-ahead sell-side outlook pieces probably won’t satisfy your quest for cosmic enlightenment. The point isn’t to deliberately venture out onto shaky limbs for the sake of it, and these aren’t black swan-hunting expeditions. So, make allowances. If your job is to prepare professional reports on our solar system, you’re not going to write The Hitchhiker’s Guide to the Galaxy, no matter how badly you might want to.
With that in mind, below are a few (very) truncated excerpts from Goldman’s lengthy “10 themes” piece for 2024, penned by Dominic Wilson, Kamakshya Trivedi, Vickie Chang and Victor Engel.
Parking the Plane: Inflation in striking distance of target across DM and EM and no imminent risk of US recession. Key market challenge is that our modal view is well-reflected in markets. [There are] bigger asymmetries in the tails of the distribution around that modal view.
The Great Escape (From a Low-Yield Equilibrium): COVID pandemic [was] the last hurrah of what felt like an inexorable move towards lower yields and low inflation post-GFC. But the big picture is that we have escaped the liquidity trap, “low-flation” and low yields [to] a more normal investing environment [with] positive real yields across asset classes.
Loosening the Inflation Constraint: Disinflation should continue to progress, even if [it’s] bumpier in places. This opens the door for a weak “Fed Put” for markets, given room to cut. But inflation needs to allow it, and that may take time.
US Exceptionalism—More on Growth than Inflation: A more globally convergent growth picture in the central scenario but US growth resilience in the face of high rates looks to be a “surer thing” than elsewhere. China has not “escaped.”
The Dark Side of “Higher for Longer”: Higher rates are warranted in the US, but can the rest of the world take it? European sovereign fault-lines are re-emerging; EM sovereign distress [is so far] limited to Frontier. Higher rates and a strong dollar complicate policy trade-offs for Japan, and China as well.
Valuing Duration: Higher yields are improving the value in bonds. A shift from inflation to growth shocks improves the correlation with equities and the portfolio value of bonds. And, as demonstrated in March, bonds provide a (cheap) recession hedge.
A Smaller Carry Cushion: [It’s] late-innings for carry. All-in yields are high, but spreads are tighter in carry assets.
Equities—Finding the Right Kind of “Yield”: Cash yields are still a high hurdle, but falling inflation and anchored rates are a better backdrop for stocks than this year. In a higher for longer world, strong-balance-sheet and larger companies may continue to outperform.
EM—The Limits of Narrow Outperformance: Striking resilience/outperformance in pockets given shocks from US rates/slower China. But, as a result, now reaching valuation constraints.
Balancing Portfolios: Major asset classes each cover a tail. Non-recessionary Fed cuts earlier in the year could open up meaningful upside across risk assets such as equities and EM while rates offer less punitive ways to hedge recession risk, and disruption risk makes commodities appealing. Stronger case for having balanced exposure across assets, not just cash.
