For investors, 2024 is the year of transition to a new economic order

Paridosh Bansal

(Reuters) – Investors appear to believe major Western central banks are close to the much-anticipated pivot from raising to cutting interest rates. Markets rallied as a result, but 2024 could hold surprises as the world adjusts to an economic order in which money is no longer cheap.

Global stocks rallied and key government bonds fell in recent weeks, despite central bankers warning against pivot bets. In the United States, for example, investors now believe the Federal Reserve is effectively positioned to guide the economy down a proper path, reducing inflation without triggering a recession.

The market's optimism comes after the US economy surprised people with its recovery. This was due in part to consumers' epidemic savings and America's allure as a safe harbor for investments in an increasingly chaotic world. And they may be right — earlier this year a well-known economist and former Fed official argued that the Fed managed soft landings more often than is commonly believed.

But many investors and executives think the probability is low. Pandemic savings are dwindling and storm clouds are gathering, especially in what is shaping up to be a contentious US election.

Investors are betting that the central bank could cut rates by as much as 1.5% by the end of 2024, but that would still keep policy rates close to 4%, higher than they have been in the past two decades. At that level, monetary policy would still be a drag on growth because it would be higher than the so-called neutral rate at which the economy neither expands nor contracts.

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Add other risks to the outlook in 2024 — two major wars, geopolitical tensions that have turned globalization firmly on its head, and elections in several countries that could radically change the world order in unexpected ways.

Why is it important?

Interest rates support everything from economic growth to the price of financial assets and how much to borrow to buy a car or home.

Higher rates make riskier assets like tech stocks and cryptocurrencies attractive because investors can earn good returns without taking on too much risk.

As money becomes harder to come by, risky bets fail and bubbles burst, leading to events like the US regional banking crisis last March. As businesses struggle, they fall back. People are losing their jobs and new ones are in short supply.

What does 2O24 mean?

While the Fed and other banks have been raising rates for over a year, the world has not yet completed the transition from free money to free money. 2024 may be the year when the effects of that shift become more apparent.

That means companies — and in some cases, entire countries — must restructure their debt obligations because they can no longer pay the interest. Some of them are already visible in emerging market debt negotiations and corporate bankruptcies. US corporate bankruptcies hit record high since 2020

In the economy, sectors like commercial real estate, some office markets hit hard by new ways of working post-pandemic, will see the most pain. As is now the case with bankrupt European property firm Cigna, more landlords will have to reassess their portfolios and hand over the keys to buildings.

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For consumers, while savings are more profitable, higher borrowing costs require adjustment. Many American adults are only aware of the low interest rates on their 30-year mortgages, for example. They have to comply with rates that are twice as high and work out the math for their budgets.

Bottomline: Investors' confidence will be tested as everyone has to figure out how to live with higher interest rates.

(Reporting by Paridosh Bansal; Editing by Anna Driver)

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