In 2023, markets surprised with strong positive returns across shares and bonds1. Inflation decreased but didn’t return to central banks’ targets. Policymakers hiked interest rates at the fastest pace in decades. And yet, we didn’t see a recession last year, despite many economists expecting that we would. Indeed, the global economy, and the US in particular, proved remarkably resilient.

So, what can investors expect in the year ahead? Below we lay out four key themes for investors to consider in 2024, relating to inflation, interest rates, economic growth and portfolio considerations.

4 key themes for investors in 2024

1. Inflation

Inflation returns to targets in 2024 although timing will vary by region.

2. Interest rates

Rates likely cut around the middle of 2024 but won’t go back to zero. Central banks are wary of the risk of cutting rates too early.

3. Growth

Growth to be below trend across advanced economies and China.


4. Portfolios

The case for a balanced portfolio of global shares and bonds2 is stronger than in recent memory.


1. Inflation: Return to central bank targets in 2024

The key question is when inflation will return to central bank targets. We expect this to occur globally in 2024. However, the return to 2% inflation, which is the target of most major central banks, will happen at different times in different regions. We forecast the UK to return to target the earliest, in the second quarter, followed by the euro area and the US in the third quarter.

This timeline represents a positive development, as we previously anticipated persistently high inflation worldwide. That said, central banks will need to strike a balance in terms of the timing and scale of rate cuts, given the risk of inflation re-emerging on the one hand and the risk of an economic downturn on the other.

The path to inflation targets


Source: Bureau of Labor Statistics, Eurostat, Office for National Statistics. Seasonally and working day adjusted data, as at 18 January 2024.

2. Interest rates: Likely cut around the middle of 2024, but won’t go back to zero

Falling inflation and weaker economic activity will allow central banks to cut interest rates from around the middle of 2024. After interest rates recede from their peaks, we expect them to settle at a higher level than we’ve seen in the past decade, in both Europe and the US. Interest rates will likely not fall to zero and will instead remain higher in the years to come.

This marks an important departure from the post-global financial crisis era, when rates were at historically low levels, and ushers in a return to more ‘normal’ levels of interest rates (where they are above the rate of inflation). This was the overarching theme of Vanguard’s economic and market outlook for 2024.

A key area to monitor in 2024 is whether interest rate cuts come too early or if central banks get the timing right and manage to engineer a ‘soft landing’ – when inflation returns to target without sparking a recession.

3. Growth: Expected to slow in the US and remain weak in Europe and China

The global economy proved more resilient than expected in 2023. This was partly because rate hikes did not restrict consumer spending – and therefore economic growth – by as much as initially thought. Other factors also contributed to resilience in the economy. These included an increase in US government spending and healthy household and company balance sheets following the Covid-19 pandemic.

In 2024, we expect this economic resilience to fade in the US. This is because interest rates will become increasingly restrictive in real (after inflation) terms as inflation falls and the positive effects of economic stimulus and healthy balance sheets will wane.

In Europe, we expect weak growth as higher interest rates linger. In China, we anticipate additional measures to support the country’s economic recovery. We believe that China will likely move to a lower, but more sustainable, growth path in the coming years.

4. Portfolio: Strong case for a balanced portfolio

What does the economic backdrop mean for investor portfolios? We think the return to a more ‘normal’ level of interest rates is the single most important and beneficial development for long-term investors in more than 20 years. This is because it sets a solid foundation for long-term returns from bonds and shares over the next decade. However, the shift to higher rates is not yet complete and near-term market volatility (or swings in prices) is likely to remain elevated.

Global bond markets have fallen in the past two years as interest rates have risen, leading to a sharp increase in bond yields3. These higher yields today mean that the outlook for long-term bond investors is better than it has been in more than a decade.

There’s a somewhat more mixed picture for shares. This is because, in our view, shares appear broadly overvalued and could be at risk of a correction. Despite this outlook, we still see long-term opportunity in shares within a balanced portfolio that is spread across different assets. This is because we expect bond and share prices to move in different directions over the long term.

The case for a diversified portfolio with 60% in shares and 40% in bonds is alive and well. Indeed, we believe it has actually strengthened. The chart below shows forecasts for a 60/40 portfolio generated by the Vanguard Capital Markets Model (VCMM), a modelling tool. The projected 10-year annualised return4 had improved to 6.2% as at September 2023, compared with 3.5% at the end of 2021.

The case for a balanced portfolio has strengthened

Notes: The chart shows the Vanguard Capital Markets Model (VCMM) forecast for 10-year annualised returns as at 31 December 2021 and 30 September 2023 for a portfolio of 60% shares and 40% bonds. Shares comprise UK shares (MSCI UK Total Return Index) and global ex-UK shares (MSCI AC World ex-UK Total Return Index). Bonds comprise UK bonds (Bloomberg Sterling Aggregate Bond Index) and global bonds ex-UK (hedged, Bloomberg Global Aggregate ex Sterling Bond Index Sterling Hedged). UK shares: 25%, UK bonds: 35%. Hedged means hedged back to local currency to manage fluctuations.

Source: Vanguard calculations in GBP based on data from Refinitiv as at 30 September 2023.

IMPORTANT: The projections and other information generated by the VCMM regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results. Distribution of return outcomes from the VCMM are derived from 10,000 simulations for each modelled asset class. Simulations are as 31 December 2021 and 30 September 2023. Results from the model may vary with each use and over time.

Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.

There may yet be further volatility in markets in 2024 because the transition to a higher interest rate environment is not yet complete. But patient investors, who maintain discipline with an allocation to global shares and bonds, are likely to be rewarded over the long term. Furthermore, because it is challenging to time financial markets, we believe investors should stay the course and maintain a long-term perspective to have the best chance of investment success.


1 Bonds are a type of loan issued by governments or companies, which typically pay a fixed amount of interest and return the capital at the end of the term.

2 A balanced portfolio is typically referred to as one with a blend of global shares and bonds, such as 60% in shares and 40% in bonds.

3 The yield of a bond shows its income as a proportion of its price. When prices fall, the yield rises and vice versa.  

4 Annualised returns show what an investor would earn over a period of time if the annual return was compounded (i.e. the investor earns a return on their return as well as the original capital).

IMPORTANT: The projections or other information generated by the Vanguard Capital Markets Model® regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. VCMM results will vary with each use and over time. The VCMM projections are based on a statistical analysis of historical data. Future returns may behave differently from the historical patterns captured in the VCMM. More important, the VCMM may be underestimating extreme negative scenarios unobserved in the historical period on which the model estimation is based.

The Vanguard Capital Markets Model® is a proprietary financial simulation tool developed and maintained by Vanguard’s primary investment research and advice teams. The model forecasts distributions of future returns for a wide array of broad asset classes. Those asset classes include US and international equity markets, several maturities of the U.S. Treasury and corporate fixed income markets, international fixed income markets, US money markets, commodities, and certain alternative investment strategies. The theoretical and empirical foundation for the Vanguard Capital Markets Model is that the returns of various asset classes reflect the compensation investors require for bearing different types of systematic risk (beta). At the core of the model are estimates of the dynamic statistical relationship between risk factors and asset returns, obtained from statistical analysis based on available monthly financial and economic data from as early as 1960. Using a system of estimated equations, the model then applies a Monte Carlo simulation method to project the estimated interrelationships among risk factors and asset classes as well as uncertainty and randomness over time. The model generates a large set of simulated outcomes for each asset class over several time horizons. Forecasts are obtained by computing measures of central tendency in these simulations. Results produced by the tool will vary with each use and over time.

Investment risk information

The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.

Any projections should be regarded as hypothetical in nature and do not reflect or guarantee future results.

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