“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.”

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