Multi-asset insights

Three market surprises of 2023 & what we’re watching entering 2024

Jan 4, 2024

Markets in 2023 kept investors on the edge of their seats. Groundbreaking technological advancements, mega-popstars being blamed for summertime inflation, and a December Fed pivot were just a few of the plot twists. We reflect on three macro developments that defied market expectations and share some of the questions that are top of mind as we turn our attention to 2024:

1. What US landing?

The widely debated “hard landing vs. soft landing” for the US economy turned out to be no landing – or maybe even a takeoff. US GDP growth sequentially accelerated all year and continually outpaced expectations. Upside revisions also diverging meaningfully from growth in Europe, which remained more tepid and in line with expectations. US consumers and corporates shrugged off higher policy rates and Uncle Sam chipped in with big fiscal incentives through the Inflation Reduction Act (IRA) and CHIPS Act. High real rates didn’t dampen real activity and final demand accelerated throughout the year despite manufacturing being in the doldrums.

US growth acceleration continued to surprise all year

US growth acceleration continued to surprise all year

Source: BlackRock with data from Consensus Economics as of December 2023.

2. What liquidity crunch?

In January 2023, the market expected US policy rates to end the year under 4.5%, as indicated by Fed Fund futures. Instead, the Federal Reserve went on to hike interest rates four more times before pausing at 5.25%. But that wasn’t the only monetary policy surprise. Despite continuing to hike, the Fed actually expanded liquidity in the spring and summer of 2023 on the back of concerns that that failure of Silicon Valley Bank would trigger a credit tightening. US liquidity was the outlier relative to other countries that deployed a broader range of monetary policy tightening tools, and this contributed to strong US equity returns.

US central bank reserves and currency in circulation expanded

US central bank reserves and currency in circulation expanded

Sources: BlackRock with data from Federal Reserve and foreign central banks, as of December 2023.

3. What China reopening?

The global demand boom that was anticipated to accompany the end of Chinese COVID lockdowns in early 2023 never materialized. Instead, continued challenges in the property sector and muted consumer demand meant that China slipped back into deflation. Tepid Chinese demand weighed on commodity and global goods prices throughout the year. In a story of contrasts and a reversal of roles, Japan’s reflation party that began in 2022 kept strengthening throughout 2023. Japanese stocks outperformed most other major markets for the second year in a row while divergence in inflation expectations between Japan vs. China created opportunities for fixed income investors.

China weighed on commodities and Japan outperformed (again)

China weighed on commodities and Japan outperformed

Source: BlackRock with data from LSEG Datastream as of December 15, 2023. The bars show the total return in local currency terms, except for gold and copper, which are spot returns. Japanese equities represented by the Topix, Chinese equities by the Shanghai A Index.

Looking Ahead:

As we look ahead to 2024, we expect the regime of greater macro dispersion and elevated market volatility to persist. In particular, we view positive stock-bond correlation as a market feature that is likely to remain so long as core inflation remains above target. As we seek to capture opportunities across countries in stock and government bond markets, key questions we are focused on include:

  • Is the inflation beast really slayed? Though markets and policymakers both want it to be true, we think getting services inflation closer to target in 2024 might prove harder than the goods deflation of 2023. In our portfolios like the Tactical Opportunities Fund, we remain short duration as the yield curve inversion makes cash more attractive compared to long bonds on a tactical horizon.
  • Is US dollar past its peak? Though fiscal concerns have receded in the closing months of 2023, the magnitude and unsustainability of the US twin deficits (government budget and current account) could exert downward pressure on the US$ in 2024; particularly if the Fed eases the policy rate outlook. We have been extending our short US dollar position in the portfolio.
  • Is Europe a bargain? The bar is low, but we are optimistic on European earnings growth. Clear signs of a stabilization in the manufacturing sector, continued wage growth, and a very high savings rate could provide a tailwind for European consumers in 2024. We like peripheral European markets like Italy and Spain.

Performance data quoted represents past performance and is no guarantee of future results. Investment returns and principal values may fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. All returns assume reinvestment of dividends and capital gains. Current performance may be lower or higher than that shown. Refer to blackrock.com for most recent month-end performance.

To obtain more information on the fund, including the Morningstar time period ratings and standardized average annual total returns as of the most recent calendar quarter and current month-end, please visit Tactical Opportunities Fund.

The Morningstar RatingTM for funds, or "star rating," is calculated for managed products (including mutual funds, variable annuity and variable life subaccounts, exchange-traded funds, closed-end funds, and separate accounts) with at least a three-year history. Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product's monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating for a managed product is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year (if applicable) Morningstar Rating metrics. The weights are: 100% three-year rating for 36-59 months of total returns, 60% five-year rating/40% three-year rating for 60-119 months of total returns, and 50% 10-year rating/30% five-year rating/20% three-year rating for 120 or more months of total returns. While the 10-year overall star rating formula seems to give the most weight to the 10-year period, the most recent three-year period actually has the greatest impact because it is included in all three rating periods.

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Tom Becker
Portfolio Manager, Global Tactical Asset Allocation Team
Tom Becker, PhD, Managing Director, is a portfolio manager on the Global Tactical Asset Allocation team within BlackRock's Multi-Asset Strategies & Solutions group. His research focus is global macro and systematic investing.