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Investment outlook
The economy and markets
Section 3
Key points to know
Recession risk: destined, delayed or dropped.
The risks of a U.S. and global recession have receded considerably after appearing elevated last year. Despite expectations for a material slowdown in growth over the course of 2023, economic data broadly surprised to the upside. Instead of flatlining, the U.S. economy grew more than 3%, while China expanded by over 5%. Both results outpaced consensus expectations. European growth was barely in positive territory, but recent trends across all three major economies have improved. Surveys of business and consumer sentiment have rebounded, and job growth has re-accelerated.
China still faces headwinds from its property market overhang and continued policy uncertainty, and developed markets show signs of incipient weakness (including still-tight lending conditions and rising consumer delinquencies). However, the overall trend is positive and we have gained confidence in the economic outlook.
Inflation concerns linger.
While the improved economic growth outlook is good news for markets, it comes with a worsening inflation outlook. For example, the U.S. economy added an extremely robust 353,000 jobs in January, the largest monthly increase since January 2023. At the same time, core consumer prices rose 0.4% for the month, also the fastest pace in a year. Although labor markets have loosened versus their extremely tight levels earlier in the cycle, they historically remain very tight. This means that wage pressures should remain elevated moving forward, ultimately putting continued upward pressure on services and housing prices (Figure 2).
At the same time, several trends that have supported recent disinflation are fading. Oil prices, which fell more than 25% from their peak last year, are now up 15% from their lows. Durable goods price inflation is already back to its historical normal level near zero, so further disinflation is unlikely from that component. In contrast, recent data in Europe and China have been encouraging, with the latter experiencing outright deflation in consumer and producer prices. On balance, we expect further disinflation to materialize this year, but probably less than the consensus expects. And upside inflation surprises can’t be ruled out entirely.
The higher-for-longer interest rate environment is likely to persist.
Interest rates move from peak to plateau.
Ultimately, the economic data will drive the rates market, and we anticipate a modest decline this year rather than a sharp drop. We believe the U.S. Federal Reserve and other major central banks will begin cutting interest rates later this year, but by less than markets currently expect.
There are some caveats. The Bank of Japan bucked the global trend by actually hiking rates for the first time in 17 years in March. Meanwhile, because China is typically less inclined to use interest rate policy as a cyclical lever, the government will probably continue providing modest fiscal stimulus instead. Overall, though, the global monetary policy backdrop supports adding duration at current levels and positioning for modest rate cuts over the balance of the year.
Election and geopolitical uncertainty rise.
With the U.S., U.K., India and other countries holding national elections in 2024, the government policy outlook is more fluid than usual. Though it is too early to make firm predictions, current polling and betting odds suggest the U.S. race is close to a tossup for both the presidency and control of Congress. With differing platforms on corporate taxes, income taxes, tariffs, defense, immigration and regulation, we could see material shifts in the fiscal and regulatory outlook.
At the same time, geopolitical uncertainty continues in Ukraine, Israel, the Red Sea and East Asia. The potential for fresh disruptions to global shipping and natural gas or oil supplies could put upward pressure on inflation via goods prices or commodities. These risks currently do not impact our base case, but they affect the tail risks in both directions and influence our portfolio allocation decisions in favor of increased diversification and caution across asset classes.
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All market and economic data from Bloomberg, FactSet and Morningstar.
The views and opinions expressed are for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. This material may contain “forward-looking” information that is not purely historical in nature.
Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition. Any changes to assumptions that may have been made in preparing this material could have a material impact on the information presented herein by way of example. Performance data shown represents past performance and does not predict or guarantee future results. Investing involves risk; principal loss is possible.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such. For term definitions and index descriptions, please access the glossary on nuveen.com. Please note, it is not possible to invest directly in an index.
Important information on risk
All investments carry a certain degree of risk and there is no assurance that an investment will provide positive performance over any period of time. Equity investing involves risk. Investments are also subject to political, currency and regulatory risks. Dividend-paying stocks are subject to market risk, concentration or sector risk, preferred security risk, and common stock risk. Diversification is a technique to help reduce risk. There is no guarantee that diversification will protect against a loss of income. Debt or fixed income securities are subject to market risk, credit risk, interest rate risk, call risk, tax risk, political and economic risk, and income risk. As interest rates rise, bond prices fall. Credit risk refers to an issuer’s ability to make interest payments when due. Below investment grade or high yield debt securities are subject to liquidity risk and heightened credit risk. Non-U.S. investments involve risks such as currency fluctuation, political and economic instability, lack of liquidity and differing legal and accounting standards. These risks are magnified in emerging markets. Investing in municipal bonds involves risks such as interest rate risk, credit risk and market risk, including the possible loss of principal. The value of the portfolio will fluctuate based on the value of the underlying securities. There are special risks associated with investments in high yield bonds, hedging activities and the potential use of leverage. Portfolios that include lower rated municipal bonds, commonly referred to as “high yield” or “junk” bonds, which are considered to be speculative, the credit and investment risk is heightened for the portfolio. Credit ratings are subject to change. AAA, AA, A, and BBB are investment grade ratings; BB, B, CCC/CC/C and D are below-investment grade ratings. As an asset class, real assets are less developed, more illiquid, and less transparent compared to traditional asset classes. Investments will be subject to risks generally associated with the ownership of real estate-related assets and foreign investing, including changes in economic conditions, currency values, environmental risks, the cost of and ability to obtain insurance, and risks related to leasing of properties. Because infrastructure portfolios concentrate their investments in infrastructure-related securities, portfolios have greater exposure to adverse economic, regulatory, political, legal, and other changes affecting the issuers of such securities. Infrastructure-related businesses are subject to a variety of factors that may adversely affect their business or operations, including high interest costs in connection with capital construction programs, costs associated with environmental and other regulations, the effects of economic slowdown and surplus capacity, increased competition from other providers of services, uncertainties concerning the availability of fuel at reasonable prices, the effects of energy conservation policies and other factors. Investors should be aware that alternative investments including private equity and private debt are speculative, subject to substantial risks including the risks associated with limited liquidity, the use of leverage, short sales and concentrated investments and may involve complex tax structures and investment strategies. Alternative investments may be illiquid, there may be no liquid secondary market or ready purchasers for such securities, they may not be required to provide periodic pricing or valuation information to investors, there may be delays in distributing tax information to investors, they are not subject to the same regulatory requirements as other types of pooled investment vehicles, and they may be subject to high fees and expenses, which will reduce profits. Alternative investments are not appropriate for all investors and should not constitute an entire investment program. Investors may lose all or substantially all of the capital invested. The historical returns achieved by alternative asset vehicles is not a prediction of future performance or a guarantee of future results, and there can be no assurance that comparable returns will be achieved by any strategy. As an asset class, agricultural investments are less developed, more illiquid, and less transparent compared to traditional asset classes. Agricultural investments will be subject to risks generally associated with the ownership of real estate-related assets, including changes in economic conditions, environmental risks, the cost of and ability to obtain insurance, and risks related to leasing of properties.
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This information does not constitute investment research as defined under MiFID.
