November 20, 2023
Higher interest rates are spreading slowly throughout the economy
The recession will push up bankruptcies and unemployment, but will also reduce inflation
Easing monetary policy will exacerbate the steepening of the yield curve
After a final stock market correction, 2024 will see the birth of the next bull market

CHART OF THE WEEK: "2023 will have been a false start"


2023 is drawing to a close. In anticipation of the festivities that will carry investors into 2024, everyone is already looking to structure their portfolios to take advantage of the macroeconomic and financial scenario that lies ahead. While 2020 will have been the year of the covid, 2021 the year of exuberance, 2022 the year of the double bear market, and 2023 the year of the bull trap, 2024 should (finally) be the year of recovery. The main challenge for investors will be not to enter the new bull market too early.

Until the capitulation phase has taken place, they will have to be wary of false starts. Otherwise, it will be difficult for them to deliver positive returns. The main advantage of our proprietary econometric models is that they guarantee the objectivity of the analysis. Although they are not perfect, they avoid the behavioural biases inherent in human beings.

According to this quantitative approach, the economic cycle will not bottom out until the second half of the year. In the first six months, activity will contract, pushing the main developed countries into recession (see Fig. 2). In the United States, the scenario is likely to take a W shape, with the recession of early 2024 mirroring that of early 2022. In Europe, the economic cycle is likely to be U-shaped, with GDP contracting earlier, more sharply and for longer than in the US, before rebounding. The key rate hikes orchestrated by the central banks in 2022-2023 are over. However, their recessionary impact will continue to spread slowly through the various sectors of the economy next year: weak order books, falling investment, increased bankruptcies, job destruction (see Fig. 3), credit contraction, budget restrictions, a slowdown in international trade, and higher interest charges.

Geopolitical tensions could keep energy prices high. On the other hand, the economic slowdown will reduce the pressure on the cyclical component of prices. Inflation should therefore rapidly converge towards the target of an annual growth rate close to, but below, 2% (see Fig. 4).

The combination of flat or even negative economic growth and controlled inflation will pave the way for an easing of monetary policy. There is no doubt that 2024 will be the year of the rate cut: the Fed and the ECB will reduce the cost of money. If history repeats itself, the cut in key rates should be early, wide-ranging and rapid, at a rate of -100 to -150 basis points per quarter (see Fig. 5). This movement will exacerbate the steepening of the yield curve (see Fig. 6). Bond investors' patience will finally be rewarded in 2024: after three years of successive underperformance, they can expect a double-digit return.

On the equity markets, the scenario should also be that of a W (see Chart of the week). At the start of 2024, growing investor anxiety should prompt some investors to capitulate, probably when the central banks intervene to combat the recession. It is only when the Fed and ECB have provided sufficient support for the economy that the most courageous will once again become buyers of equities, initiating the start of a new and powerful bull market. Like 100-metre sprinters, the challenge for investors will be not to enter the race before the signal. A false start would disqualify the annual performance of their portfolios.

On the foreign exchange market, all currencies will benefit from the fall in interest rates and the associated depreciation of the US dollar. The euro will appreciate as the main alternative currency (see Fig. 7), while gold will no longer have anything to hold it below USD 2,000 an ounce. After three long years of stability, its price will soar.

This scenario, although relatively classic, is not consensual. Unlike those sketched out by the main investment banks, and contrary to the excessive optimism conveyed by traders, it takes account of the fact that that macroeconomic time is a long time. An economic contraction, like a bear market, lasts several years. The good news is that this phenomenon generates tremendous opportunities (see Fig. 8).

In short, 2024 should be an exceptional year and investors will be able to take advantage of it:

  • Sovereign bonds and investment-grade corporates will benefit from lower yields.
  • Extending duration will allow a benefit from falling inflation.
  • Strategies based on yield curve steepening will benefit from the return of the "present bias".
  • Initially, defensive value stocks, whether in the healthcare and consumer staples sectors, or listed in Switzerland, will outperform. Large caps will be preferred.
  • In a second phase, cyclical growth stocks will benefit from monetary easing: cars, airlines, hotels and luxury goods. Small caps and emerging markets will benefit from the coming recovery.
  • Specific themes, such as energy or the fight against obesity, will outperform in both sequences.
  • By contrast, everything to do with the real estate market will suffer.
  • The greenback will reduce its overvaluation in favour of most of its counterparts: the euro and the Swiss franc.
  • Gold will appreciate as soon as the Fed eases monetary policy.
  • Structured products with capital protection, which made a comeback in 2022 and 2023, will continue to offer good opportunities in the first half of the year. Thereafter, participation strategies will gradually take over.

The main risk surrounding our central scenario is that "something will break". In forty years, global debt has doubled. The rise in interest rates implemented over the last two years has been so powerful that it is likely to generate a crash. Our econometric modelling suggests that an acute crisis could be avoided, but the risk remains: sovereign debt crisis, solvency crisis of zombie companies, banking crisis, real estate crisis, etc.


The rise in interest rates is over, but its effects are not. In the end, it will push the major economies into recession, giving the 2023 stock market rally the look of a false start. Once the easing of monetary policy is underway, the capitulation phase is over, and the rebound in leading indicators has been confirmed, there will be nothing to stop stock market indices from soaring. Let's look forward to (the second half of) 2024 for the bull market!


Financial Research