An economic slowdown carries a potential windfall for your nest egg
After years of festive growth and exuberant stimulus, the global economy may be in for a hungover new year.
According to a forecast survey by consultancy Consensus Economics, economists expect global growth to slow to 2.1% next year—down from 2.4% this year.
While the downgrade might seem small, in a global economy of hundreds of trillions, it packs a punch.
But don't run for the hills just yet. As counterintuitive as that sounds, experts remind investors that a slowing economy could be a good thing for a part of your nest egg.
Bonds are king again
If things go south next year, central banks will likely have no choice but to cut interest rates to support the economy.
From a purely technical standpoint, lower rates are good news for investors because they tend to push many asset prices up—with the most immediate effect felt by bonds.
Think of it like this: if you bought a bond with a 5% interest rate, and new bonds only yield 3%, everyone's going to want to buy your old bond. That will drive its price up.
Gautam Khanna, the co-head of U.S. multi-sector fixed income at Insight Investment, believes that the end of the Fed's tightening cycle is a golden chance for investors to buy bonds.
In a memo to clients, he wrote that "[t]his is perhaps the best opportunity to invest in fixed-income over the past 15 years."
Similarly, David Kelly, the chief global strategist at J.P. Morgan Asset Management, sees prices rising for long-term Treasury and corporate bonds over the next year or two.
Investment research firm Morningstar thinks that falling rates could drive up stock prices too.
"Bonds will certainly rally if yields fall in line with our forecasts,” Morningstar said. “And while not guaranteed, we expect that falling interest rates would likely also lift stock prices.”
But while a slowing economy could potentially deliver quite a windfall for investors, there's always a risk that things could get out of hand.
Is a recession imminent?
In the face of post-Covid inflation, the Fed chose to raise interest rates at 11 of its 12 previous meetings before September.
That’s an extraordinarily quick tightening cycle, which, economists predict, will eventually tip the world unto a recession.
So far, though, robust consumer demand and low unemployment allowed major economists to get away scot-free. But just because rate hikes weren't' followed by an immediate downturn doesn’t mean the economy is out of the woods.
In fact, experts think the recession has simply been pushed back.
Nathan Sheets, chief economist at Citi, says that some of the weaknesses previously expected this year are being pushed into next.
“Services demand continued largely unabated, the labor market has stayed strong, [and] wages have continued to rise,” he said. “There will be a recession, it’s just going to come later.”
The American Bankers Association recently set the odds of a 2024 recession at 50%, stating, “The delayed impact of monetary tightening, deteriorating credit availability, and high credit costs.”
Abbey Omodunbi, senior economist at PNC Financial Services, says that the economy can’t outrun high rates forever. “The current labor market situation is unsustainable and economic activity will start to cool in late 2023 or early 2024,” he said.
The anticipated lag effect of higher interest rates has become the basis of recent grimmer growth forecasts.
Experts expect rate cuts in 2024
For the time being, the Fed looks set to hold rates steady.
The central bank’s next meeting is on Sept. 19-20. In one poll, more than 95% of economists predicted that rates would be kept in their current range at the September meeting, which aligns with market expectations.
According to Citi’s chief U.S. economist, Andrew Hollenhorst, the countdown to a recession, and with it, lower interest rates, however, is already underway.
"In our base-case forecast, the economy enters a recession in the first half of next year, which would have the Fed cutting rates by Q2,” Hollenhorst said.
Ultimately, the future path of asset prices is uncertain, and markets may not react the way experts expect.
But unless a full-blown recession breaks out, a little slowdown might bring some unexpected benefits for everyday investors, including a windfall in the fixed-income part of their nest eggs.