(Yahoo!Finance) - The markets surprised to the upside this year, with the Nasdaq (IXIC) up 24% since the start of 2023, and the S&P 500 (GSPC) 15% higher during the same period. The Dow Industrial Average (DJI) is up 8% year-to-date.
While some analysts are still calling for a recession next year, Citi Global Wealth researchers say not to hold your breath.
“We’re projecting no recession, rather a slowing of the economy," with a re-acceleration in the second half of 2024 into 2025, David Bailin, chief investment officer of Citi Global Wealth, said ahead of the groups bi-annual economic forecast.
In a piece titled “Slow then grow,” the forecasters note rolling recessions impacted cyclical industries like housing and manufacturing in 2023. The group predicts individual sector recessions will continue in 2024, before “rolling out" or fading.
They expect inflation to come down to 2.5% by the end of next year while employment growth slows as hiring in the services sector eases. Slowing inflation and a cooling labor market should help corporate profits rebound at the same time that bond yields come down.
“This whole backdrop should set the stage for stronger accelerating growth in 2025,” said Steven Wieting, chief economist at Citi Global Wealth, “What we really see now emerging is a new financial market environment.”
Citi Global Wealth estimates investors who got out of the market right after the 2022 downturn, are likely down by about 15% right now.
Given the backdrop forecast for next year, the forecasters caution against staying on the sidelines and waiting for 'the right time' to invest.
"You rarely get an entry point when stocks and bonds are very attractively priced, given the economic outlook," said Bailin.
"We think that a 60/40 portfolio or a core portfolio could have really terrific performance over the course of the next two years and potentially beyond," he added, referring to a 60% equities, 40% bonds mix.
Citi Global Wealth says investors should lock in potentially higher bond yields now as the Fed is likely done with its rate hiking cycle.
The yields on Treasuries are materially higher now than they were two years ago. They are poised to fall later once the Federal Reserve starts lowering rates again as some market participants expect.
In the equities market, investors can expect to see opportunities beyond the “Magnificent Seven,” which dominated the major averages' gains this year. The forecasters see growth potential within industries related to economic security.
"What we're seeing governments and businesses invest in — [is] redundant tech supply chains, redundant energy supply chains, cybersecurity and defense - are all very tangible areas of growth that we believe investors can take advantage of," said Wieting.
Citi Global Wealth’s investment ideas include:
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Semiconductor equipment makers
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Cybersecurity stocks
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Western energy producers, equipment and distributors
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Copper miner equity/clean energy infrastructure
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Defense contractors
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Medical technology; tools companies
While individual investors may be worried about stocks going into next year, the downbeat sentiment could bode well for potential upside.
"With investor sentiment being somewhat negative, this sets us up for what we think are very good markets," said Bailin.
By Ines Ferré · Senior Business Reporter
