As 2023 draws to a close, it may become known as the year of the recession that never happened, but it remains to be seen if that good fortune holds in 2024, according to the Cetera Financial Group.

Although the economy proved to be more resilient this year than many expected, 2024 is still full of unknowns, Cetera said in its “2024 Annual Market Outlook: The Fed: From Foe to Friend.”

“Market volatility eased in 2023, yet could be elevated in 2024—especially if the Federal Reserve Board is reluctant to cut rates in the face of weak growth or falling inflation. Volatility could favor both bonds and equity asset classes that have been out of favor in recent years, such as small-caps and value,” Cetera said.

“Risks remain in the economy and markets, but in many areas the economic data is improving off its lows. Inflation is moderating and expected to be around 2.5% next year, which should give room for the Fed to reverse its interest rate policies and cut rates,” the report said.

Both bonds and equities could benefit if the Fed is convinced the inflation is under enough control to actually start cutting rates, Cetera said. At the same time, diversification of portfolios—always a good strategy—may gain even more favor in the coming year.

“Large-cap growth stocks carried the market for much of 2023, but other stocks may shine if earnings growth comes in as many anticipate next year. With bonds finally paying a real return, they could provide solid diversification for any equity volatility,” Cetera said.

The U.S. election and geopolitics will still have an impact, the report said. Through all of these sometimes contradictory influences “the Fed has been a headwind for the economy for some time, [but] it could switch from foe to friend if a recession materializes in 2024,” according to the outlook.

The fact that a recession did not materialize in 2023 is no guarantee that it is not still waiting in the wings, Cetera said. As it turned out in 2023, the report said, ”the U.S. economy exceeded expectations for almost the entire year, as first and second quarter gross domestic product growth topped 2%, and the third quarter well exceeded the first two quarters with growth just north of 5%.”

Economic growth may be weak at the start of the new year, Cetera asserted. “Some leading economic indicators are pointing toward weakness, while other factors, such as the resumption of student loan payments and a high federal budget deficit making more stimulus unlikely, could contribute to a 2024 recession,” the report noted.

Inflationary expectations for 2024 are encouraging, “with many forecasts—including the Fed's—in the 2.5% range, meaning the Fed could get comfortable enough to cut rates even if a recession does not occur,” Cetera said. “Ultimately, the Fed was tougher than many anticipated in 2023, but it appears it has stopped raising interest rates and cuts are possible in 2024.”

For businesses, earnings growth is expected to be better next year with performance broadening beyond growth sectors, which should help support equity markets.