Vanguard economic and market outlook for 2024: A return to sound money 

A few highlights:

A return to sound money

For households and businesses, higher interest rates will limit borrowing, increase the cost of capital, and encourage saving. For governments, higher rates will force a reassessment of fiscal outlooks sooner rather than later. The vicious circle of rising deficits and higher interest rates will accelerate concerns about fiscal sustainability. Vanguard’s research suggests the window for governments to act on this is closing fast—it’s an issue that must be tackled by this generation, not the next.

For well-diversified investors, the permanence of higher real interest rates is a welcome development. It provides a solid foundation for long-term risk-adjusted returns. However, as the transition to higher rates is not yet complete, near-term financial market volatility is likely to remain elevated.

Bonds are back

Global bond markets have repriced significantly over the last two years because of the transition to the new era of higher rates. In our view, bond valuations are now close to fair, with higher long-term rates more aligned with secularly higher neutral rates. Meanwhile, term premia have increased as well, driven by elevated inflation and fiscal and monetary outlook uncertainty.

But monetary policy will bare its teeth

The U.S. exceptionalism is set to fade in 2024. We expect monetary policy to become increasingly restrictive as inflation falls and offsetting forces wane. The economy will experience a mild downturn as a result. This is necessary to finish the job of returning inflation to target. However, there are risks to this view. A “soft landing,” in which inflation returns to target without recession, remains possible, as does a recession that is further delayed. In Europe, we expect anemic growth as restrictive monetary and fiscal policy lingers while in China, we expect additional policy stimulus to sustain economic recovery amid increasing external and structural headwinds.

See also . . .

For more about what’s in store in 2024, watch Vanguard’s Joe Davis talk about how higher interest rates can be good news for savers and investors in this video.