Investment Insight
December 19, 2023

2024 Outlook: What’s Next After the “Fed Pivot”?

About the Author

avatar
Torsten Slok

Partner, Chief Economist

About the Author

avatar
Torsten Slok

Partner, Chief Economist

The “Fed pivot” in December to a dovish stance underscores the rapidly shifting outlook for both growth and inflation. Going into 2024, we still see upside risks to inflation, downside risks to growth, and expect rates to stay higher and for longer than the rest of the market does. In this paper, Chief Economist Torsten Slok discusses the implications for corporate growth, banking, consumer spending, and financial markets.

Key Takeaways

The members of the Federal Reserve Open Market Committee (FOMC) “pivoted” to a more dovish stance in their last meeting of the year on December 13, holding rates steady and signaling that the inflation outlook has improved more quickly than anticipated. They also suggested three potential rate cuts in 2024.

  • The “Fed pivot” underscores the rapidly shifting outlook for both growth and inflation. Going into the new year, we still see upside risks to inflation and downside risks to growth. Because:
  • Despite signaled Fed rate cuts in 2024, we expect interest rates to stay higher and for longer than the rest of the market does. We arrive at our thesis through a combination of cyclical and secular drivers, including still-tight Federal Reserve monetary policy, higher borrowing needs by the US Treasury, the loosening of yield-curve control policy in Japan, and reduced buying and diminished inventory of US debt held by China and others.
  • Two major factors driving consumer spending are largely unrelated to current Fed policy: Households are running out of excess savings and student-loan payments are restarting. The combination of these two dynamics increases the odds of a meaningful slowdown in consumer expenditures, a key driver of US growth.
  • We see many signs that the Fed’s rate hikes are working to cool off the economy. Consumers are already feeling the pinch, with increased delinquencies in both credit-card debt and auto loans. Similarly, a corporate default cycle has started, and employment is beginning to soften. Finally, bank-loan growth has been slowing sharply in recent months.
  • Despite the Fed’s aggressive tightening campaign, inflation remains above the central bank’s 2% annual target. We’ve long argued that rates will stay higher and for longer than the market expects. But, if above-target inflation persists, they may go higher yet.
  • All that said, we do not entirely discount the possibility of upside economic surprise. This idiosyncratic economy has defied consensus predictions for some time now, and it may continue to do so. A soft landing is not out of the question.

The implications for capital markets?

  • We believe private credit offers an attractive opportunity today given higher yields in general and on senior secured debt in particular—allowing investors to boost income generation in their portfolios with downside protection.
  • Opportunities in private equity are likely to continue to emerge among potential distressed companies that come along with the combination of slowing growth and high rates. Moreover, we see opportunities in assets that can offer some level of inflation protection, such as infrastructure.
  • In real assets, particularly real estate, we see more compelling risk-adjusted return opportunities in credit than in equity at this stage of the economic cycle.
  • Public equities are as unappealing as they have been in 20 years due to stretched valuations. Public bonds—with risk-free yields on 10-year Treasuries hovering around 4.0% as of this writing—appear attractive to investors interested in “locking” higher rates in their fixed-income portfolios. That said, attention to duration risk remains warranted.

The information herein is provided for educational purposes only and should not be construed as financial or investment advice, nor should any information in this document be relied on when making an investment decision. Opinions and views expressed reflect the current opinions and views of the authors and Apollo Analysts as of the date hereof and are subject to change. Please see the end of this document for important disclosure information.

Important Disclosure Information

This presentation is for educational purposes only and should not be treated as research. This presentation may not be distributed, transmitted or otherwise communicated to others, in whole or in part, without the express written consent of Apollo Global Management, Inc. (together with its subsidiaries, “Apollo”).

The views and opinions expressed in this presentation are the views and opinions of the author(s) of the White Paper. They do not necessarily reflect the views and opinions of Apollo and are subject to change at any time without notice. Further, Apollo and its affiliates may have positions (long or short) or engage in securities transactions that are not consistent with the information and views expressed in this presentation. There can be no assurance that an investment strategy will be successful. Historic market trends are not reliable indicators of actual future market behavior or future performance of any particular investment which may differ materially, and should not be relied upon as such. Target allocations contained herein are subject to change. There is no assurance that the target allocations will be achieved, and actual allocations may be significantly different than that shown here. This presentation does not constitute an offer of any service or product of Apollo. It is not an invitation by or on behalf of Apollo to any person to buy or sell any security or to adopt any investment strategy, and shall not form the basis of, nor may it accompany nor form part of, any right or contract to buy or sell any security or to adopt any investment strategy. Nothing herein should be taken as investment advice or a recommendation to enter into any transaction.

Hyperlinks to third-party websites in this presentation are provided for reader convenience only. There can be no assurance that any trends discussed herein will continue. Unless otherwise noted, information included herein is presented as of the dates indicated. This presentation is not complete and the information contained herein may change at any time without notice. Apollo does not have any responsibility to update the presentation to account for such changes. Apollo has not made any representation or warranty, expressed or implied, with respect to fairness, correctness, accuracy, reasonableness, or completeness of any of the information contained herein, and expressly disclaims any responsibility or liability therefore. The information contained herein is not intended to provide, and should not be relied upon for, accounting, legal or tax advice or investment recommendations. Investors should make an independent investigation of the information contained herein, including consulting their tax, legal, accounting or other advisors about such information. Apollo does not act for you and is not responsible for providing you with the protections afforded to its clients.

Certain information contained herein may be “forward-looking” in nature. Due to various risks and uncertainties, actual events or results may differ materially from those reflected or contemplated in such forward-looking information. As such, undue reliance should not be placed on such information. Forward-looking statements may be identified by the use of terminology including, but not limited to, “may”, “will”, “should”, “expect”, “anticipate”, “target”, “project”, “estimate”, “intend”, “continue” or “believe” or the negatives thereof or other variations thereon or comparable terminology.

The Standard & Poor’s 500 (“S&P 500”) Index is a market-capitalization-weighted index of the 500 largest U.S. publicly traded companies by market value.

Additional information may be available upon request.


Recommended For You