2024 outlook: Navigating the last mile of the cycle

 man at computer

After more than a decade of stocks traveling a path paved by historically and persistently low interest rates, higher yields have driven a winding road for market returns in recent years. In 2024, we think markets will navigate the last mile in the inflation and Federal Reserve tightening cycles, bringing more open road but also some bumps along the way.

Equities and bonds fell into a bear market in 2022 as the Fed began hiking interest rates to fight four-decade-high inflation. 2023 brought periods of sharply rising and falling interest rates, with stocks staging a solid rebound.

We think 2024 will bring the next phase of the cycle. Inflation should continue to moderate amid a slowing economy. And we expect the Fed to slowly transition away from a restrictive interest rate policy, helping clear the road for a renewed expansion.

The market won’t dodge every pothole as this takes shape. But we think 2024 will ultimately prove to be a positive year for both stock and bond returns. If you want to learn more from Edward Jones, several strategists discussed our 2024 outlook in the webinar “2024 Market Outlook: Preparing for What’s Ahead”. Also consider watching our Market Compass video series to hear our latest thoughts on market and economic developments.

Source: FactSet, S&P 500 Index, 10-year Treasury yield.

Here are 10 of our key views for 2024.

Planning strategies and considerations for 2024

While the markets, the economy and life in general can be unpredictable, having a plan can help you navigate this uncertainty and achieve your goals. Below are a few items to consider when reviewing and updating your plan for 2024.

4 actions you can consider based on our outlook

1. Review the starting point of your portfolio’s design. Your investment strategy should balance your comfort with risk, time horizon and financial goals. Therefore, we consider the long-term target allocations of your investment strategy a neutral starting point for the design of your portfolio.

Talk with your financial advisor about our strategic asset allocation guidance, which highlights our recommendation to allocate across 11 asset classes. This guidance can help ensure you’re positioned to benefit from diversification and aligned with your risk and return objectives.

2. Favor equity over fixed income, particularly U.S. equity. Given our expectation for inflation to moderate and central banks to become less restrictive, the environment is likely to be supportive for stocks and bonds. However, the greater opportunity lies within equities, in our view.

We recommend offsetting an underweight to U.S. investment-grade bonds by reallocating toward U.S. mid-cap stocks, which we believe can help balance quality with catch-up potential within equities. We also favor the relative quality, stronger earnings growth potential and momentum of U.S. large-cap stocks over the risks within emerging-market equity, such as policy and regulatory uncertainty amid slowing growth in China.

3. Reposition equity sector exposure to benefit from catch-up potential. We recommend overweighting industrials and utilities, which have lagged over the past year but are likely to benefit from economic and interest rate trends. We also favor consumer discretionary, given its cyclicity.

Consider underweighting communication services, which has run up substantially. We also recommend lower allocations to financials, due to slow loan growth and commercial real estate risks, as well as materials, due to its exposure to China growth concerns.

4. Favor greater interest rate sensitivity within fixed-income allocations. Emerging-market debt has historically outperformed U.S. high-yield bonds following the peak of the Federal Reserve tightening cycle, but has lagged recently, which increases its attractiveness. The asset class is also more sensitive to interest rates, which could benefit portfolios given our expectation for interest rates to drift lower. Consider a slight reallocation from U.S. high-yield bonds to emerging-market debt.

We also recommend reallocating toward high-quality long-term bonds by reducing overweight allocations to cash and short-term bond investments. This could help lock in the benefits of today’s higher yields and lower reinvestment risk.

Talk with your financial advisor about our outlook, which drives our timely portfolio guidance. Consider how incorporating this guidance into your portfolio can help you prepare for the year ahead.

Opportunistic portfolio guidance

Our opportunistic asset allocation guidance represents how we recommend positioning your portfolio across asset classes, based on current market conditions and our global outlook, while helping you stay appropriately diversified and within your comfort with risk. A neutral position indicates we recommend aligning your portfolio with your long-term strategic target allocations.

 Chart showing opportunistic asset allocation guidance
Source: Edward Jones.

Our opportunistic equity style guidance represents how we recommend positioning between value- and growth-style equity within U.S. stock asset classes and the international large-cap stock asset class, based on current market conditions and our global outlook.

 Chart showing Opportunistic equity style guidance
Source: Edward Jones.

Our opportunistic equity sector guidance represents how we recommend positioning across sectors within the U.S. equity allocations of your portfolio, based on current market conditions and our global outlook over the next six to 12 months. The guidance is relative to the sector weights of the S&P 500.

 Chart showing Opportunistic equity sector guidance
Source: Edward Jones.

Our opportunistic U.S. investment-grade bond guidance represents how we recommend positioning across maturities and sectors within your higher-quality bond allocations, relative to the Bloomberg U.S. Aggregate Bond Index. Longer-term bonds generally carry more interest rate risk than shorter-term bonds. Corporate bonds have more credit risk than U.S. government bonds.

 Chart showing Opportunistic US investment grade bond
Source: Edward Jones.

Asset class performance

Asset class performance
U.S. investment-grade bonds2.7-4.10.8
U.S. high-yield bonds10.11.34.3
International bonds6.2-1.91.2
Emerging-market debt5.8-3.81.4
U.S. large-cap stocks22.39.813.8
International large-cap stocks13.03.47.0
U.S. mid-cap stocks11.85.110.4
U.S. small-cap stocks8.50.87.0
International small- & mid-cap stocks8.7-0.85.1
Emerging-market equity4.2-5.82.7

U.S. equity sector performance

U.S. equity sector performance
Consumer discretionary37.73.711.9
Consumer staples-
Health care-
Information technology54.016.125.0
Materials 7.87.312.2
Communication services48.83.011.3
Real estate5.55.25.9
S&P 50022.39.813.8

Source: Morningstar Direct,12/11/2023. Cash represented by the Bloomberg US Treasury Bellwethers 3-Month index. U.S. investment-grade bonds represented by the Bloomberg US Aggregate index. U.S. high-yield bonds represented by the Bloomberg US HY 2% Issuer cap index. International bonds represented by the Bloomberg Global Aggregate Ex USD hedged index. Emerging-market debt bonds represented by the Bloomberg Emerging Market USD Aggregate Index. U.S. large-cap stocks represented by the S&P 500 Index. Developed international large-cap stocks represented by the MSCI EAFE index. U.S. mid-cap stocks represented by the Russell Mid-cap index. U.S. small-cap stocks represented by the Russell 2000 Index. International small- and mid-cap stocks represented by the MSCI EAFE SMID index. Emerging-market equity represented by the MSCI EM index. All performance data reported as total return. An index is unmanaged and is not available for direct investment. Performance does not include payment of any expenses, fees or sales charges, which would lower the performance results. The value of investments fluctuates, and investors can lose some or all of their principal. Past performance does not guarantee future results.

Investment Policy Committee

The Investment Policy Committee (IPC) defines and upholds Edward Jones investment philosophy, which is grounded in the principles of quality, diversification and a long-term focus.

The IPC meets regularly to talk about the markets, the economy and the current environment, propose new policies and review existing guidance — all with your financial needs at the center.

The IPC members — experts in economics, market strategy, asset allocation and financial solutions — each bring a unique perspective to developing recommendations that can help you achieve your financial goals.

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Important Information:

Investing in equities involves risks. The value of your shares will fluctuate, and you may lose principal. ​

Special risks are inherent to international investing, including those related to currency fluctuations and foreign political and economic events.

Before investing in bonds, you should understand the risks involved, including credit risk and market risk. Bond investments are also subject to interest rate risk such that when interest rates rise, the prices of bonds can decrease, and the investor can lose principal value if the investment is sold prior to maturity.

Systematic investing does not guarantee a profit or protect against loss. Investors should consider their willingness to keep investing when share prices are declining.

Diversification does not ensure a profit or protect against loss in a declining market.