Are Allocators Too Optimistic About 2024?

Most investors think the Federal Reserve can engineer a soft landing and avoid a recession. Yield curve data shows otherwise.


Illustration by II

Despite warnings of a recession from some industry experts, allocators are by and large optimistic about where the markets are heading.

“Every passing day people become less concerned about a recession,” said Mark Anson, chief executive officer at Commonfund.

The optimism, according to a new survey of 203 allocators from Commonfund, is driven by the belief that the U.S. Federal Reserve can engineer a soft landing, lowering interest rates while avoiding a recession.

According to the survey, 51 percent of allocators believe that a soft landing was likely, and a further 27 percent said it was “very likely.”

“But we still have yet to see the Fed reduce rates,” Anson pointed out. “They have been telegraphing it, but they have yet to start. For such a large group of people to have such large faith in the Fed before the Fed has started to cut rates is a bit ahead of the game.”

He added that the yield curve remains inverted. Since World War II, an inversion has preceded a recession — either this time around is an anomaly, or a recession is still to come.

Allocators aren’t completely blind to the market’s risks, though. Their primary concern these days is political risks in the United States. Sixty-one percent of respondents ranked the U.S. presidential election as one of their top two economic concerns for 2024. Continued inflation and interest rate adjustments were the second-most-popular response, with 42 percent choosing the issue.

“You can’t predict politics,” Anson said. “Part of it is to wait and see. What it does do is create more volatility and uncertainty in the markets.”

Despite these concerns, return expectations show that investors by and large are more optimistic about what’s to come in 2024. According to the survey, 45 percent said they expect that this year’s returns will be about the same as the ten-year annualized return for the S&P 500 index (11.02 percent). This is a more than a 20 percentage point increase year-over-year, when just 22 percent held that view. What’s more is that 19 percent expect higher returns.

Meanwhile, fewer investors are bearish year-over-year. Thirty-five percent said they expect returns to be lower than average, a decrease from last year’s 67 percent. Only 1 percent expect losses.

Allocation-wise, most are staying the course, except private equity, where 45 percent of allocators said they plan to boost investments. Perhaps unsurprisingly, then, half of investors surveyed said they expect the asset class to be among the top three that deliver the best absolute returns over the next twelve months. However, this is a 20 percentage point decline year-over-year — perhaps a harbinger of lower returns to come.

Interestingly, although asset owners have been heavily focused on adding private credit exposure to their books, just 33 percent said they expect the best returns to come from this asset class in 2024. In addition to private equity, public equity and venture capital ranked ahead of private credit.

Investors are becoming more confident in their ability to hit target returns over the next ten years. More than half surveyed said they were “cautiously optimistic,” while 32 percent said they were “very bullish” — a 10 percentage point increase year-over-year. Meanwhile, 13 percent said they were “feeling nervous,” an eight percentage point decline from 2023.

“That seems a little bit more optimistic than what we build into our allocation models,” Anson said. “Again, if we look in our rearview mirror, that was a damn good 2023. People may be saying let’s keep the pedal to the metal and the Fed will do what they need to.”