Vanguard, LPL and Goldman predict more 'normal' economy in 2024

Like the other two firms, Vanguard expects inflation to continue its downward trajectory, allowing the Federal Reserve to ease up on interest rates (just as the Fed intends to do). By the end of 2024, Vanguard predicts that core inflation will sink to 2.3%, down from 4% in November 2023. And it expects the Fed to bring the federal funds rate down to between 3.5% and 4%, down from 5.5% today.

"Looking ahead, we believe that the Federal Reserve and other central banks will win the fight against inflation," Vanguard wrote. "We expect short- and long-term interest rates to recede from their peaks but settle at higher levels than we've become accustomed to."

Will these high rates push the country into a recession? Vanguard's answer is ambivalent.

"The economy will experience a mild downturn," Vanguard predicted. However, "a 'soft landing,' in which inflation returns to target without recession, remains possible, as does a recession that is further delayed."

As for specific investments, Vanguard's view is divided. For stocks, the firm believes "near-term financial market volatility is likely to remain elevated" as the market adjusts to higher interest rates. Bonds, meanwhile, are likely to see their returns "increased substantially" — leading Vanguard's researchers to declare, "Bonds are back!"

On inflation and interest rates, LPL sounds a lot like Vanguard. The firm believes yearly price increases will come down to about 2.8% — above the Fed's 2% target — but the central bank is unlikely to overreact. In fact, LPL thinks it could bring the federal funds rate down to 4.5% by the end of 2024 — slightly higher than Vanguard's forecast, but still lower than today's 5.5%.

"We expect to see a Fed focused less on inflation and more on the other part of their dual mandate — stable growth," LPL wrote. "Inflation will still hover above the 2% long-run target and remain a concern, but the Fed will likely be less laser-focused given that the trajectory is going in the right direction."

As for the "R" word, LPL's answer is complicated. The broker-dealer says a "mild recession" is likely — but it wouldn't be the end of the story.

"In 2024, we believe a recession is likely to emerge … but a Fed that is sensitive to risk management might provide an offset by taking interest rates down again in the new year," the firm said.

In fact, LPL sees this recession as a potentially useful "turning point." If it spurs the Fed to lower rates, that could give a boost to the stock market and the economy in general. Meanwhile, a downward shift in the yield from bonds could send their prices back up, bringing the bond market "back to normal."

"While a recession could be an event that marks this turning point, in context it could turn out better than expected," LPL wrote. "In fact, we believe the most likely outcome in 2024 is a scenario in which the stock market looks past the negatives of recession."

Finally, there's the biggest optimist of the group: Goldman Sachs. The Manhattan-based firm believes "more disinflation is in store over the next year," with core inflation falling very close to the Fed's 2% target. And it expects the Fed to follow through with its plan to start cutting interest rates in the second half of the year.

As for the recession question, Goldman's answer is a confident "No."

"We continue to see only limited recession risk and reaffirm our 15% U.S. recession probability," the firm wrote. "We expect several tailwinds to global growth in 2024, including strong real household income growth, a smaller drag from monetary and fiscal tightening, a recovery in manufacturing activity and an increased willingness of central banks to deliver insurance cuts if growth slows."

In this environment, both stocks and bonds will be good investments. Returns from equities, the firm predicted, will "exceed cash" in 2024. And with interest rates beginning to edge downward but remaining relatively high, the bond market is likely to benefit.

"The transition to a higher interest rate environment has been bumpy, but investors now face the prospect of much better forward returns on fixed income assets," Goldman wrote. "We envisage positive returns in the mid-single to low-double digits for bonds, credit, and equities for the first

time in several years."

One word that comes up again and again in Goldman's report — as well as Vanguard's and LPL's — is "normalization." As the unusual problems of the post-pandemic period continue to recede, many analysts — and not just at those three firms — see an economy returning to healthier, more predictable conditions next year.

"We expect lower inflation, but more importantly, we expect consumers and businesses to reap the benefits of lower inflation," Cox said. "That's an economy that's healing."