The global economy will continue to suffer through uncertainty and sub-trend growth in 2024, according to State Street’s 2024 Global Market Outlook.

The firm noted that 2023 was plagued with persistent inflation, muted growth and tightening of monetary policy from central banks and said this year investors can expect more uncertainty as the impact of high interest rates moves through the global economy.

The firm believes that based on the indicators, the economy is heading for a soft landing, but Matt Nest, global head of Active Fixed Income, said two factors indicate that could not be the case. 

“If you look at any of the spot data it squarely points to soft landing,” he said. “If you look at the historical track record of such cycles, that would call all this into question.”

The second indication pertains to the traditional forward-looking indicators, such as manufacturing indices or the yield curve, which point to a market contraction, according to Nest.

“That’s where the balance lies,” he said. “Do you trust the spot data, do you trust history or do you trust the forward-looking data?”

The chances of a soft landing are precarious as some central banks, such as the Federal Reserve, may look to lower rates, the report said. If that happens, Nest cautioned it could lead to more inflation in the coming year. 

Geopolitical events could also impact inflation as well, according to the report. It noted that territorial conflicts such as the wars in the Middle East and Ukraine are becoming more commonplace and could impact prices.

“We consider they pose enough risk to be more inflationary, thereby derailing the disinflation trajectory, and disrupting terms of trade for large economies,” the report said. “In short, geopolitical events could deliver smaller stagflationary impulses.”

Oil prices could also be impacted as a major shift in the energy markets has occurred as the U.S. became a net exporter of energy and stopped being a net consumer, the report said.

“The U.S. dollar and oil correlation makes it worse for all importers as each boom/bust cycle is exacerbated ... the positive correlation is even more pronounced,” the report said. “This relationship has geopolitical implications, as it further increases the incentives for swing oil producers to underpin tight supply.”

With a marginal supply, it could result in a spike in oil prices for the coming year, the report found. Prices could drop should demand drop in both the U.S. and China.

State Street is leaning heavily into fixed-income funds because they will be best positioned from a risk/reward perspective, the firm said. 

“With rate hikes still filtering through the global economy, we believe an overweight duration position in sovereign debt, namely [U.S. Treasurys], will enable investors to price in lower rates and a bullish steepening next year,” Nest said, in a statement.

The firm sees fixed income as being successful regardless of what the economy does going forward, Nest explained.

“It should be favorable in either environment for fixed income,” he said. “I think the risk you face in fixed income is if you get a re-acceleration despite short-term interest rates being five and a half percent.”

The firm believes that the chances of a re-escalation of inflation are greater if rates come down. The odds decline if rates go up again, Nest explained.

The firm recommends an overweight in duration and in the high-quality segment of fixed-income products. There are other opportunities within the commercial mortgage market because it is priced for a hard landing, Nest said.

The firm said that equities will have a “challenging year" because of high interest rates and slower economic growth. Still, the report said there are opportunities with high-quality funds and U.S. equities.

"While the asset class performed better than expected in 2023, its recent strength, together with rising bond yields, have led to a reduced equity risk premium, which the firm believes makes equities a less attractive prospect,” the firm said. “The U.S. market is preferred due to its sector composition and the competitive advantage of its companies.”