As we look towards the future, the trajectory of markets and the economy suggests a gradual return to the conditions reminiscent of the pre-2008 era. Goldman Sachs, analyzing the economic landscape, anticipates a modest 15% probability of recession in the upcoming year.
This forecast is bolstered by several tailwinds poised to underpin global growth and investment opportunities, signaling a shift away from the economic climate we've grown accustomed to since 2008.
Goldman Sachs' strategists, including Jan Hatzius, emphasize that the global economy has surpassed expectations in 2023, and this trend of disinflation is expected to continue. This shift marks the end of an era characterized by exceptionally low interest rates.
In a recent client note titled, "The Hard Part Is Over," the Goldman team suggests that 2024 will be a pivotal year, potentially breaking free from the post-Global Financial Crisis (GFC) pattern of low inflation and negative real yields. They argue that the era of 'liquidity trap' and 'secular stagnation,' which defined the last decade, is nearing its end.
The transition away from the easy-money policies has been turbulent, manifesting in high market volatility and challenging financial conditions. This shift has been particularly hard on 'zombie' corporations, leading to an increase in their collapse. Goldman strategists raise the question of whether a reversion to pre-GFC interest rates will stabilize, especially considering potential sovereign stress in Europe.
The Federal Reserve's strategy of near-zero interest rates post-GFC is evolving towards a higher-rate environment. This change could pose challenges for heavily indebted firms and affect broader business dynamics. Other Wall Street analysts, like Charles Schwab, also predict a surge in distressed debt and financial difficulties in the near future, as tighter financial conditions take hold, with defaults peaking in the next year or so.
Regarding market opportunities, Goldman Sachs foresees a positive outlook. They expect rates, credit, equities, and commodities to outperform cash in 2024. Hatzius notes that despite the challenges, the shift from the easy-money era presents a more normalized investment environment, with real expected returns looking positive.
The firm anticipates a continued decline in inflation, growth in real household income, a resurgence in manufacturing activity, and a potential easing of interest rates by central banks, including the Federal Reserve.
Goldman remains cautiously optimistic for 2024, acknowledging heightened risks. While the path of disinflation seems steady, there's a possibility that central banks might maintain higher interest rates longer than anticipated. Additionally, there are concerns about growth, especially if high interest rates lead companies to adjust their inventory levels to below 2019 standards, potentially delaying the recovery in global manufacturing.
This outlook offers a comprehensive view for wealth advisors and RIAs, highlighting both the potential opportunities and risks in the evolving economic landscape as we transition away from the patterns established since the GFC.
