As we go into 2024, the question of whether the U.S. economy will achieve a soft landing still hangs in the air. This question is, of course, intertwined with others: What will happen in the job market? When will the Fed start cutting rates? What’s the outlook for bonds and equities?

To provide perspective on these topics and more, the investment management team at BOK Financial has prepared the following outlook on key issues affecting the economy and financial markets heading into the new year.

Inflation

Although inflation doesn’t have to hit the Federal Reserve’s 2% target in 2024, it must keep trending downwards toward that figure, said BOK Financial® Chief Investment Officer Brian Henderson. If it doesn’t, the Fed might have to start raising rates again, which lowers the possibility of the U.S. economy achieving a “soft landing.”

Labor market

The Fed has been closely monitoring job data to determine whether its rate hikes are adequately slowing the economy to bring down inflation. “Ideally, we will continue to see the number of open jobs come down faster than actual unemployment goes up. That’s probably the path to getting inflation back toward 2% without going through a recession,” said Steve Wyett, BOK Financial’s chief investment strategist. “How the labor market unfolds is going to tell the tale.”

Corporate earnings

Currently, projections are for S&P 500 earnings to grow 10% in 2024, said Matt Stephani, president of Cavanal Hill Investment Management, Inc. “We’ll be watching to see if that is reasonable. We think that might be a little aggressive, given that the Fed is trying to slow the economy.”

Bond market, including bond spreads

Overall, we expect the bond market to perform positively in 2024, based on the assumptions that the Fed will either keep rates stable or cut them slightly in the second half of the year, said Leslie Lukens Martin, tax-exempt fixed income portfolio manager for Cavanal Hill Investment Management.

Meanwhile, one of the factors we’ll be watching closely throughout the year is the spread between 10-year Treasury bonds and 10-year corporate bonds. “It’s a good indicator to follow to see the strength of the economy and financial markets,” said Mark Buntz, director of alternative investments for BOK Financial.

Foreign monetary policy

We will be paying a close eye on the Bank of Japan in particular, Henderson added. Japan is one of the few developed economies that has not moved away from zero-interest-rate policies, but they may do so in 2024 because of higher inflation. “If they do, it could drive some of the yields in the U.S. and other developed markets higher,” he explained.