MINNEAPOLIS, Dec. 5, 2023 /PRNewswire/ - The Federal Reserve's aggressive rate hike will ultimately constrain GDP growth, pushing the economy into a mild recession in the first half of next year, RBC Wealth Management suggests in its Global Insight 2024 Outlook, released Tuesday.

Investors will need to be nimble given the U.S. stock market will be wading through more political and economic crosscurrents than usual. And with U.S. bond yields elevated, investors will have a wider range of investment options than they have had in many years.

"The S&P 500's above-average valuation and Wall Street's rosy corporate profit outlook leave little wiggle room for economic disappointments in 2024," said Kelly Bogdanova, vice president and portfolio analyst at RBC Wealth Management – U.S. "We think the bond market could potentially deliver strong returns, particularly in certain sectors that have lower credit risk."

U.S. equities: More political, economic crosscurrents call for nimble positioning

A wider-than-usual range of economic outcomes, a market positioned for a rosy scenario, another noisy election year and stocks competing with bonds are just some of the crosscurrents long-term investors should be watching for in in 2024, according to the report.

But S&P 500 returns for the next 12–18 months will largely depend on whether a U.S. recession materializes.

"The good news is that even if a recession occurs and sets a correction in motion, the market typically has bounced back and establishes a new uptrend partway through recession periods," Bogdanova said. "Long-term investors have historically benefited by using such corrections as opportunities to add market exposure."

To balance the risk of a recession against the possibility that one may be averted, RBC Wealth Management analysts recommend holding Market Weight exposure to U.S. equities heading into 2024.

Investors should anticipate market performance broadening out beyond the seven technology-oriented stocks and three sectors that led the rest of the market by a wide margin, contributing significantly to S&P 500 gains for much of 2023. The report suggests tilting portfolio holdings toward reasonably valued stocks of high-quality companies with reliable cash flow generation, sustainable and growing dividends, lower debt levels and strong management teams.

Small-capitalization stocks are also viewed favorably, as their unusually low absolute and relative valuations seem to RBC analysts like they are already pricing in a recession.

U.S. fixed income: Bonds are back

After a long, rough road and potentially three back-to-back calendar years of negative returns, bonds look poised to bounce back in 2024.

As 2023 comes to a close, the Bloomberg U.S. Aggregate Bond Index now yields nearly 5.5%, among the highest levels of the past 20 years. From this elevated starting point, history suggests bonds may be poised to return 6.6% in 2024.

Yield only explains about 40% of the bond market's performance in any given year; the rest comes from price movements. That's where additional performance could come from, the report suggests. The benchmark 10-year Treasury yield largely underpins the firm's performance expectations for the rest of the bond market. RBC Capital Markets forecasts the current yield of 4.6% fading to 3.95% by the end of 2024. That could drive a gain of approximately 5% in the price of the bond on top of the 4.6% yield earned over the year, for a projected total return of nearly 10%.

"Most sectors are likely to perform strongly, but those with lower credit risks – such as Treasuries, mortgage-backed securities and investment-grade corporate bond – may outperform. High-yield corporate bonds and municipal bonds are currently too rich relative to Treasuries, in our view," said Tom Garretson, senior portfolio strategist for RBC Wealth Management – U.S. "We expect those valuations to return to more normal levels in 2024 as economic growth slows, and as a result, returns could modestly lag the rest of the market."

Read the full report here.

About RBC Wealth Management – U.S.

In the United States, RBC Wealth Management operates as a division of RBC Capital Markets, LLC. Founded in 1909, RBC Wealth Management is a member of the New York Stock Exchange, the Financial Industry Regulatory Authority, the Securities Investor Protection Corporation, and other major securities exchanges. RBC Wealth Management has $544 billion in total client assets with more than 2,100 financial advisors operating in 190 locations in 42 states.

About RBC

Royal Bank of Canada is a global financial institution with a purpose-driven, principles-led approach to delivering leading performance. Our success comes from the 94,000+ employees who leverage their imaginations and insights to bring our vision, values and strategy to life so we can help our clients thrive and communities prosper. As Canada's biggest bank and one of the largest in the world, based on market capitalization, we have a diversified business model with a focus on innovation and providing exceptional experiences to our more than 17 million clients in Canada, the U.S. and 27 other countries. Learn more at rbc.com.

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SOURCE RBC Wealth Management - U.S.

Mild recession, bond bounce back likely in 2024, RBC Wealth Management suggests