MINNEAPOLIS, Dec. 5, 2023
/PRNewswire/ - The Federal Reserve's aggressive rate hike will
ultimately constrain GDP growth, pushing the economy into a mild
recession in the first half of next year, RBC Wealth Management
suggests in its Global Insight 2024 Outlook, released
Tuesday.
Investors will need to be nimble given the U.S. stock market
will be wading through more political and economic crosscurrents
than usual. And with U.S. bond yields elevated, investors will have
a wider range of investment options than they have had in many
years.
"The S&P 500's above-average valuation and Wall Street's
rosy corporate profit outlook leave little wiggle room for economic
disappointments in 2024," said Kelly
Bogdanova, vice president and portfolio analyst at RBC
Wealth Management – U.S. "We think the bond market could
potentially deliver strong returns, particularly in certain sectors
that have lower credit risk."
U.S. equities: More political, economic crosscurrents call
for nimble positioning
A wider-than-usual range of economic
outcomes, a market positioned for a rosy scenario, another noisy
election year and stocks competing with bonds are just some of the
crosscurrents long-term investors should be watching for in in
2024, according to the report.
But S&P 500 returns for the next 12–18 months will largely
depend on whether a U.S. recession materializes.
"The good news is that even if a recession occurs and sets a
correction in motion, the market typically has bounced back and
establishes a new uptrend partway through recession periods,"
Bogdanova said. "Long-term investors have historically benefited by
using such corrections as opportunities to add market
exposure."
To balance the risk of a recession against the possibility that
one may be averted, RBC Wealth Management analysts recommend
holding Market Weight exposure to U.S. equities heading into
2024.
Investors should anticipate market performance broadening out
beyond the seven technology-oriented stocks and three sectors that
led the rest of the market by a wide margin, contributing
significantly to S&P 500 gains for much of 2023. The report
suggests tilting portfolio holdings toward reasonably valued stocks
of high-quality companies with reliable cash flow generation,
sustainable and growing dividends, lower debt levels and strong
management teams.
Small-capitalization stocks are also viewed favorably, as their
unusually low absolute and relative valuations seem to RBC analysts
like they are already pricing in a recession.
U.S. fixed income: Bonds are back
After a long, rough
road and potentially three back-to-back calendar years of negative
returns, bonds look poised to bounce back in 2024.
As 2023 comes to a close, the Bloomberg U.S. Aggregate Bond
Index now yields nearly 5.5%, among the highest levels of the past
20 years. From this elevated starting point, history suggests bonds
may be poised to return 6.6% in 2024.
Yield only explains about 40% of the bond market's performance
in any given year; the rest comes from price movements. That's
where additional performance could come from, the report suggests.
The benchmark 10-year Treasury yield largely underpins the firm's
performance expectations for the rest of the bond market. RBC
Capital Markets forecasts the current yield of 4.6% fading to 3.95%
by the end of 2024. That could drive a gain of approximately 5% in
the price of the bond on top of the 4.6% yield earned over the
year, for a projected total return of nearly 10%.
"Most sectors are likely to perform strongly, but those with
lower credit risks – such as Treasuries, mortgage-backed securities
and investment-grade corporate bond – may outperform. High-yield
corporate bonds and municipal bonds are currently too rich relative
to Treasuries, in our view," said Tom
Garretson, senior portfolio strategist for RBC Wealth
Management – U.S. "We expect those valuations to return to more
normal levels in 2024 as economic growth slows, and as a result,
returns could modestly lag the rest of the market."
Read the full report here.
About RBC Wealth Management – U.S.
In the United States, RBC Wealth Management
operates as a division of RBC Capital Markets, LLC. Founded in
1909, RBC Wealth Management is a member of the New York Stock
Exchange, the Financial Industry Regulatory Authority, the
Securities Investor Protection Corporation, and other major
securities exchanges. RBC Wealth Management has $544 billion in total client assets with more
than 2,100 financial advisors operating in 190 locations in 42
states.
About RBC
Royal Bank of Canada is a global financial institution with
a purpose-driven, principles-led approach to delivering leading
performance. Our success comes from the 94,000+ employees who
leverage their imaginations and insights to bring our vision,
values and strategy to life so we can help our clients thrive and
communities prosper. As Canada's
biggest bank and one of the largest in the world, based on market
capitalization, we have a diversified business model with a focus
on innovation and providing exceptional experiences to our more
than 17 million clients in Canada,
the U.S. and 27 other countries. Learn more at rbc.com.
We are proud to support a broad range of community initiatives
through donations, community investments and employee volunteer
activities. See how at rbc.com/community-social-impact.
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SOURCE RBC Wealth Management - U.S.