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Fourth quarter economic outlook

January 16, 2024
clock 5 MIN READ

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Hello, I'm Vivian Estadt, Client Service Director at SEI. I'm here with Chief Market Strategist and Senior Portfolio Manager Jim Solloway, who will be presenting our economic outlook for 2024. This time last year, investor sentiment was quite subdued following a year of sharp declines in stock and bond prices. Investors are much more optimistic following the stellar performance of global equities and a reversal in bond markets. Jim, what are your feelings about financial markets as we head into 2024?

Thanks, Vivian. Investor sentiment is certainly enthusiastic. This is no doubt driven in part by the performance of the magnificent seven US mega-cap technology stocks that are almost single-handedly responsible for global stock market performance this year. However, in our view, those stocks look expensive, as some kind of pullback in 2024 would not be surprising. The chart on the screen tracks the valuations of large-cap stocks, US technology sector, and international stocks. While US large-cap and technology stocks saw some price correction in 2022, valuations remain elevated and are based on earnings estimates that we believe are probably too optimistic.

Given those valuations and earnings expectations, is there somewhere else that looks more attractive to you?

Yes, I believe there may be better opportunities in 2024 in a variety of other asset classes, including small-cap and international stocks.

What trends are you watching for this year?

The extent of any changes in the current trajectory of stock and bond markets will depend on perceptions about economic growth, the corporate profits outlook, the path of inflation, and central bank responses. Take corporate profits, for example. We believe that profit margins are likely to come under pressure, as previous secular tailwinds turn into headwinds. Since unemployment remains low, companies will continue to face upward wage pressures. As lower debt matures, companies will need to finance operations with more expensive debt. Efforts to diversify supply chains away from China will temporarily reduce productivity. We also expect governments will seek to repair their fiscal positions through higher corporate taxes, while also pushing companies to adopt environmentally conscious practices aimed at reducing the use of fossil fuels. Economy-wide profits have already declined from the peak levels reached in 2021 and lately have been in the same range as in the five-year period between 2010 and 2015, a time when the economy was struggling to grow out of the global financial crisis.

It sounds as though you are not as bullish as the general consensus. Would you go as far as to say you're entering 2024 as a bear?

I say I'm cautious. With animal spirits running high, it would not be surprising to see this bull market stumble early in 2024. However, there are many cross-currents that make it difficult to forecast the path of financial assets through the year. A weaker than expected economy would likely undercut investors' optimistic earnings growth assumptions. It also could lead to a more aggressive monetary policy easing by the US Federal Reserve. However, a big decline in interest rates already seems to be largely discounted by the markets. It's our view though that the US economy will not fall off a cliff in the next six months. If it surprises on the upside however, central banks might not be able to cut interest rates as much as markets are expecting and bond yields are not likely to fall much. That would be a problem for stocks but it also would likely be a problem for bonds. More than ever, we believe that broad diversification across styles and asset classes is the best way to hedge against the uncertain outcomes facing investors in 2024.

Thanks, Jim. We always appreciate your insights. SEI is focused on the major issues that are of interest to our clients. We incorporate these discussions into our advisory process as the impact varies based on each client's goals. For more of SEI's insights, read our latest economic outlook available on our website.

Important information 

This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events or a guarantee of future results. All information as of the date indicated. Statements that are not factual in nature, including opinions, projections and estimates, assume certain economic conditions and industry developments and constitute only current opinions that are subject to change without notice. Nothing herein is intended to be a forecast of future events, or a guarantee of future results. Certain economic and market information contained herein has been obtained from published sources prepared by other parties, which in certain cases have not been updated through the date hereof. While such sources are believed to be reliable, neither SEI nor its affiliates assumes any responsibility for the accuracy or completeness of such information and such information has not been independently verified by SEI. There are risks involved with investing, including loss of principal. The value of an investment and any income from it can go down as well as up. Investors may get back less than the original amount invested. Past performance is not a reliable indicator of future results. Investment may not be suitable for everyone. This material is not directed to any persons where (by reason of that person's nationality, residence or otherwise) the publication or availability of this material is prohibited. Persons in respect of whom such prohibitions apply must not rely on this information in any respect whatsoever. The information contained herein is for general and educational information purposes only and is not intended to constitute legal, tax, accounting, securities, research or investment advice regarding the strategies or any security in particular, nor an opinion regarding the appropriateness of any investment. This information should not be construed as a recommendation to purchase or sell a security, derivative or futures contract. You should not act or rely on the information contained herein without obtaining specific legal, tax, accounting and investment advice from an investment professional. Information in the U.S. is provided by SEI Investments Management Corporation (SIMC), a wholly owned subsidiary of SEI Investments Company (SEI). Information provided in Canada by SEI Investments Canada Company, the Manager of the SEI Funds in Canada.

James Solloway

Chief Market Strategist and Senior Portfolio Manager

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