As you check up on your finances heading into the new year, you might find a bit of good news: The recession that everyone expected in 2023 never materialized. Looking into 2024, our strategists now expect that while the U.S. economy is likely to slow, it should avoid recession. The lower likelihood of a painful economic downturn should bode well for your investment portfolio and financial decision making going into the new year.

That said, the reduced risk of a recession is just one element in a shifting financial landscape. As the economy has emerged from the COVID-19 pandemic over the past few years, the most important development in the markets has been the historic increase in bond yields. As you plan for the year ahead, it’s critical to recognize of the impact of higher interest rates.

In their Outlook 2024 report (PDF), the Global Investment Strategists at J. P. Morgan focus on what a 5% interest rate world could mean for the economy, financial markets and your portfolio. Our strategists believe that this unique environment has opened up pockets of opportunity for investors over the coming year. This will give you more flexibility to choose different types of investment vehicles that align with your specific goals.

U.S. highlights

• Our strategists believe that while we could see a growth slowdown in the first half of 2024, growth should resume in the second half of the year.  They have placed the probability of a deep recession at 25%.
• A shrinking gap between job openings and unemployed workers in the U.S. – as well as a cooldown in U.S. wage growth to less than 5% from a peak over 7% – suggest that the Federal Reserve is making progress in its fight to reduce inflation.
• Our strategist team estimates that the Fed could start to cut interest rates sometime in the second half of 2024. If the rate cuts come in response to normalized inflation rather than a recession, the cutting cycle will likely be slower than what we saw during the early 2000s, Great Financial Crisis (GFC) and COVID-19 pandemic.
• The Bipartisan Infrastructure Bill, CHIPS Act and Inflation Reduction Act have contributed to an unprecedented surge in manufacturing construction over the past two years.

Global highlights

• Following interest rate hikes by central banks around the world, global inflation has moderated from its peak of close to 10% in the summer of 2022 to a current pace of less than 5%. Although geopolitics and energy prices pose a risk, our strategists see more gravity weighing down inflation than buoyancy pushing it up.
• While offering investors the luxury of choice today, higher yields have also been a headwind to the broad global economy. Global multi-asset portfolios haven’t gained much ground since November 2020, and investment-grade debt has posted negative total returns for three years in a row. In other words, high rates may be beneficial in some ways, but the price has largely been paid by the investors who have seen relatively underwhelming returns in their global portfolios as a result.
• Artificial intelligence (AI) may see a potential boost in productivity, with governments incentivizing certain industries like financials, airlines and healthcare.
• Governments around the globe are also incentivizing investments in important areas like national security, the energy transition, semiconductors, infrastructure and supply chains.

Stocks vs. bonds in 2024

One big impact of higher interest rates is that bonds are now as competitive with stocks as they have been since before the GFC. With bonds offering such promising returns, you might be wondering if fixed-income investments deserve a larger share of your portfolio.

Our strategists estimate that U.S. aggregate bonds should deliver 5%-plus returns over the next 10-15 years with just a quarter of the volatility of large-cap stocks. In exchange for the added volatility, U.S. large-cap stocks should reward investors with returns of 7% over the same time frame, according to our team.

The best way for you to navigate this tradeoff thanks to newfound investment flexibility, depends on your personal situation and goals.

If your priority is to lower your downside risk and limit the range of potential outcomes, it could make sense to shift toward more bond exposure. But if you’re aiming to maximize your upside potential, you might want to keep your portfolio tilted toward stocks.

What about cash?

The higher-yield environment might also have you considering whether it’s worthwhile to hold your assets in cash into next year and beyond.

Although cash has a place in every investor’s plan and looks even more attractive today, our strategists expect cash to underperform most asset classes in 2024.

While there is nothing wrong with holding cash – and clients have more than doubled their allocation to cash in investment accounts since 2021– it’s important to consider whether cash has the right attributes to help you reach your objectives. Rather than overdoing it on cash in your portfolio, our team recommends taking an intentional approach by defining a goal and then funding a pool of capital designed to achieve it.

What if inflation is here to stay?

Inflation in the U.S. has fallen to between 3.5% and 4% on an annual basis, down from its highs of over 8% in the summer of 2022. Our strategists predict that inflation will continue to decline toward the Fed’s target, likely settling between 2% and 2.5%. A “higher-for-longer” stance from the Fed (i.e., when certain prices or wages aim to keep inflation above the target rate), a normalized labor market and a lower impact of energy price swings on the overall price basket should help keep inflation in check.

A continued cooldown in inflation will likely come as welcome news, but there are still a few inflationary pressure points to keep an eye on. For one thing, industrial policy and the transition to clean energy could support higher commodity prices. It’s also possible that the inflation shock of 2021 and 2022 could echo in consumers’ inflation expectations.

The bottom line

Heading into 2024, J. P. Morgan’s Global Market Strategists believe that you have more options for your portfolio than at any time since before the GFC. You may be able to take advantage of higher interest rates to reach your goals while taking on less risk than you would have thought possible just two years ago.

As you consider your path forward in a 5% interest rate world, it’s always worth talking with a financial advisor about the best way to align your portfolio with your goals.