(Kitco News) - Recession fears may have receded ahead of the new year; however, one bank is warning investors that the U.S. economy still isn’t out of the woods just yet, as the first half could see slower growth than expected.
In their 2024 outlook webinar, analysts and economists at Wells Fargo noted the discrepancy between market expectations surrounding U.S. rate cuts and the outlook for the economy. Markets are fairly optimistic that the U.S. can avoid a recession, but they are pricing in roughly 150 basis points of easing next year.
Darrell Cronk, president and chief investment officer of wealth and investment management at Wells Fargo, noted that these two market calls run counter to each other. He explained that the Federal Reserve will not cut rates aggressively if economic growth remains relatively healthy.
Wells Fargo is looking for the Federal Reserve to cut interest rates only two times next year. However, analysts do see downside risks to the economic outlook.
“Either this soft landing is going to re-accelerate and we're going to be dealing with inflation again, or this soft landing is only for a moment in time and the economic slowdown broadens and deepens and we find ourselves in a much harder landing, which would be really bad,” said senior global market strategist Sameer Samana in the presentation.
The bank noted that this environment of diametrically opposed views is expected to create some volatility in U.S. bond markets, which in turn could be good for gold as a store of value. Overall, the bank recommends investors take a more defensive position in their portfolios, at least for the first half of 2024, as they expect the real economy, led by consumer demand, to weaken more than expected.
Looking specifically at gold, Wells Fargo expects the precious metal to trade between $2,100 and $2,200 an ounce in 2024. John LaForge, head of real assets at the bank, said in an interview with Kitco News that while gold has solid potential to see record-high prices next year, the market needs a sustained break above its recent all-time highs.
He noted that gold has been range-bound for the last three years, underperforming broader commodities, which is why some investors are hesitant to jump in.
“Right now, gold has to prove itself. Investors are saying: ‘Show me the breakout.’ I think once the market gets above $2,100 with some conviction, then it’s going to be a lot of fun,” LaForge said.
He noted that while investors may still be sitting on the sidelines, they are paying more attention to gold after its performance this past year. LaForge pointed out that gold faces some significant headwinds as the Federal Reserve aggressively raised interest rates. Now that the tightening cycle has ended, gold should benefit from lower real rates.
“Considering the magnitude of the headwinds, gold prices impressively managed to hold key support levels, and even rallied some,” LaForge said in his outlook presentation. “We believe gold could add to its positive price momentum in 2024 as its recent headwinds appear poised to reverse and become tailwinds.”
At the same time, the U.S. government's growing debt adds further volatility to fixed-income markets. LaForge said that this risk creates additional opportunities for gold.
“With all the debt in the world and with everything that is going on, there are so few assets like gold that are no one’s liabilities,” he said. “It’s a bare instrument, and I think people are going to want these types of bare instruments until we have figured the debt stuff out.”
While gold has an essential role to play in a portfolio, Laforge also noted that it still remains only a part of a well-diversified portfolio. In its 2024 portfolio ideas, market analysts at Wells Fargo recommended having broad exposure to commodities, and said investors should look to buy on weakness in the first half of the new year.
“Within commodities, we remind investors to remain diversified and not concentrate in one class or subclass, including gold,” the analysts said.
Another interesting portfolio idea is for investors to lock in current bond yields instead of trying to play the anticipated volatility.
“We believe investors currently have an opportunity to lock in the highest yields in decades. As long as the bonds are from high-quality issuers, an investor can lock in a known yield out to the maturity date with limited default risks,” the analysts said. “Building a laddered bond position as part of a diversified portfolio that adds multiple maturities is one way to take advantage of high rates while hedging against the possibility of variable rates in the future.”