‘Promising’ 2023 Events May Disappoint Investors Next Year, Warns Wells Fargo By Investing.com

© Reuters. “Promising” 2023 events may disappoint investors next year, Wells Fargo warns

Wells Fargo strategists expect a turbulent trajectory for inflation to reach the Fed’s 2% target, especially if the economic slowdown is less pronounced than expected.

As 2023 draws to a close, Wells Fargo predicts a gradual evolution of the economic slowdown, highlighting waning support from massive consumer spending in early 2024.

Factors contributing to this scenario include the pandemic’s drain on excess cash balances across income quintiles, rising credit delinquencies, increased reliance on credit to sustain purchases and indications of weakness in consumer spending in third-quarter corporate earnings releases.

As a result, strategists are warning of a potential reversal of the stock rally in 2023.

“Investors expected the Fed to cut rates seven times starting in 2021, but stocks
assemblies have been reversed in the last six cases,” they said.

“Upbeat developments throughout much of this year risk disappointing investors in 2024 as cascading weaknesses become increasingly evident.”

The spike in real interest rates that occurred in 2023 is expected to put further pressure on the economy next year, driven by the lagged impact of the Federal Reserve’s tightening of credit.

Wells Fargo envisions the Fed keeping the federal funds rate in the 5.25-5.50% range until the economic slowdown puts further pressure on inflation, choosing to avoid early rate cuts that could threaten higher inflation.

Despite these challenges, strategists foresee critical key points in both the business cycle and Federal Reserve policy. The bank expects disinflation to gain strength through a moderate economic slowdown, setting the stage for a rate cut in the second half of 2024. The upcoming US presidential election is expected to increase market volatility.

“Given our underlying case for the economy, we reiterate our more defensive portfolio guidance with a focus on quality in both equity and fixed income positions and patience until signs of a new economic cycle emerge,” the strategists concluded.