Vanguard, LPL and Goldman predict more 'normal' economy in 2024

December 19, 2023 4:09 PM

Vanguard, LPL Financial and Goldman Sachs expect the U.S. economy to recover next year from high inflation and other post-pandemic maladies.

What will the U.S. economy look like in 2024? Three of the world's largest financial firms have a word for it: normal.

In the past two months, Vanguard, LPL Financial and Goldman Sachs have published "outlook" reports, sketching out their predictions for 2024. And in many ways, they're surprisingly similar: All forecast a stronger, stabler U.S. economy, recovering from some of the strange problems that have dogged it in the post-pandemic era.

Specifically, the firms expect inflation to keep falling, interest rates to inch downward and bond values to come back up. And though they disagree over the likelihood of a recession, all three see a "soft landing" as a strong possibility.

"In 2024, we believe markets will make a definitive turn to a more recognizable place," LPL wrote. "Where the last two years had investors focused on inflation, market volatility and striving for a sense of economic balance, we now can expect to see some return to the previous status quo — that is, a less stringent Fed, normalizing inflation and a slower growth environment."

Even the titles of the reports reflect this sense of getting back on track: Vanguard's study is subtitled "A Return to Sound Money." LPL's is "A Turning Point." Goldman's, reassuringly, is "The Hard Part Is Over."

And it's not just these three firms who foresee this. Callie Cox, an investment analyst at eToro, generally agreed that the economy will be on a more even keel next year.

"It seems like we're taking a step closer to normal," Cox said.

Here's a closer look at what Vanguard, LPL and Goldman predict for 2024:

Vanguard

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Like the other two firms, Vanguard expects inflation to continue its downward trajectory, allowing the Federal Reserve to ease up on interest rates (just as the Fed intends to do). By the end of 2024, Vanguard predicts that core inflation will sink to 2.3%, down from 4% in November 2023. And it expects the Fed to bring the federal funds rate down to between 3.5% and 4%, down from 5.5% today.

"Looking ahead, we believe that the Federal Reserve and other central banks will win the fight against inflation," Vanguard wrote. "We expect short- and long-term interest rates to recede from their peaks but settle at higher levels than we've become accustomed to."

Will these high rates push the country into a recession? Vanguard's answer is ambivalent.

"The economy will experience a mild downturn," Vanguard predicted. However, "a 'soft landing,' in which inflation returns to target without recession, remains possible, as does a recession that is further delayed."

As for specific investments, Vanguard's view is divided. For stocks, the firm believes "near-term financial market volatility is likely to remain elevated" as the market adjusts to higher interest rates. Bonds, meanwhile, are likely to see their returns "increased substantially" — leading Vanguard's researchers to declare, "Bonds are back!"

LPL Financial

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On inflation and interest rates, LPL sounds a lot like Vanguard. The firm believes yearly price increases will come down to about 2.8% — above the Fed's 2% target — but the central bank is unlikely to overreact. In fact, LPL thinks it could bring the federal funds rate down to 4.5% by the end of 2024 — slightly higher than Vanguard's forecast, but still lower than today's 5.5%.

"We expect to see a Fed focused less on inflation and more on the other part of their dual mandate — stable growth," LPL wrote. "Inflation will still hover above the 2% long-run target and remain a concern, but the Fed will likely be less laser-focused given that the trajectory is going in the right direction."

As for the "R" word, LPL's answer is complicated. The broker-dealer says a "mild recession" is likely — but it wouldn't be the end of the story.

"In 2024, we believe a recession is likely to emerge … but a Fed that is sensitive to risk management might provide an offset by taking interest rates down again in the new year," the firm said.

In fact, LPL sees this recession as a potentially useful "turning point." If it spurs the Fed to lower rates, that could give a boost to the stock market and the economy in general. Meanwhile, a downward shift in the yield from bonds could send their prices back up, bringing the bond market "back to normal."

"While a recession could be an event that marks this turning point, in context it could turn out better than expected," LPL wrote. "In fact, we believe the most likely outcome in 2024 is a scenario in which the stock market looks past the negatives of recession."

Goldman Sachs

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Finally, there's the biggest optimist of the group: Goldman Sachs. The Manhattan-based firm believes "more disinflation is in store over the next year," with core inflation falling very close to the Fed's 2% target. And it expects the Fed to follow through with its plan to start cutting interest rates in the second half of the year.

As for the recession question, Goldman's answer is a confident "No."

"We continue to see only limited recession risk and reaffirm our 15% U.S. recession probability," the firm wrote. "We expect several tailwinds to global growth in 2024, including strong real household income growth, a smaller drag from monetary and fiscal tightening, a recovery in manufacturing activity and an increased willingness of central banks to deliver insurance cuts if growth slows."

In this environment, both stocks and bonds will be good investments. Returns from equities, the firm predicted, will "exceed cash" in 2024. And with interest rates beginning to edge downward but remaining relatively high, the bond market is likely to benefit.

"The transition to a higher interest rate environment has been bumpy, but investors now face the prospect of much better forward returns on fixed income assets," Goldman wrote. "We envisage positive returns in the mid-single to low-double digits for bonds, credit, and equities for the first

time in several years."

One word that comes up again and again in Goldman's report — as well as Vanguard's and LPL's — is "normalization." As the unusual problems of the post-pandemic period continue to recede, many analysts — and not just at those three firms — see an economy returning to healthier, more predictable conditions next year.

"We expect lower inflation, but more importantly, we expect consumers and businesses to reap the benefits of lower inflation," Cox said. "That's an economy that's healing."