2023 was full of economic headwinds to new and ongoing geopolitical conflicts, chaos in Congress, a banking crisis, and more. 2024 will bring new headwinds the for the markets, with looming deadlines to avoid a government shutdown, escalating geopolitical conflicts and more. HSBC Global Private Banking and Wealth Chief Investment Officer, Americas Jose Rasco joins Yahoo Finance to give insight into the outlook for 2024 and what investors should expect when it comes to economic headwinds and potential volatility in the market.

Rasco points out there are two potential headwinds coming out of Washington at the beginning of the year: the 2024 election process begins and another scramble to avert a government shutdown.

Rasco comments on the 2024 election and the potential fallout after: "I think regardless of who is in the White House, the key is really the split in power. If you get a Democrat or Republican in the White House, it is clearly important that we have Congress on the other side of the fence because when you get that gridlock in Washington, markets tend to do better. That is really the key because markets do not like surprises. Therefore, we need that split in power, regardless who wins."

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Video Transcript

BRIAN SOZZI: Major stock indexes are heading toward another weekly win to round out the year. We've seen stocks reach record highs the last few weeks as investors are more optimistic heading into 2024. But what could derail this rally?

Let's bring in Jose Rasco, chief investment officer of Americas at HSBC Global Private Banking and Wealth. Jose, good to see you here. A lot of folks that I'm talking to on the street right now, I guess maybe in typical form, are looking for a correction in the first two weeks of January. Do you see that happening?

JOSE RASCO: Well, I think-- good morning, first of all. And thanks for having me on. And I think-- look, happy new year to everyone. But as we head to the new year, look for the market to begin to incorporate a couple of things. Number one is the election process begins in early January.

Secondly, don't forget, we could be heading toward a government shutdown mid-January and early February. And they know they need to get this done. But it is an election year, so expect a lot of volatility around politics and geopolitics. We still have two major wars going on. And clearly, I think the market has risen dramatically and we're still bullish on US equities, don't get me wrong, over the long-term, over the course of 2024. But in the short-term, a correction would not be shocking at all, no.

BRAD SMITH: A shutdown risk, once again, as we've continued to kick the can down the road multiple times at this point. When you think about this probability of an actual shutdown versus those prior, what would you place that at right now?

JOSE RASCO: Oh boy! I think you have to factor in two things. Number one is the need for airtime. It's an election year. It's a presidential election year. So there's going to be a lot of bantering back and forth and using the media to try to achieve other goals than the budget.

Now, remember there is a hard stop in the second quarter at the end of March, I believe it is, as we hit the second quarter where all spending would get cut by 1%. So they know they need to get this done. So worst case scenario, I think we could see a month or two of this. But I'm really hopeful that they achieve something. But I think a modest shutdown, the odds are probably higher than we're comfortable with.

BRIAN SOZZI: Jose, who's better for the market? I think these discussions are going to start happening now. Another four years of President Biden or another four years of returning hypothetically President Trump?

JOSE RASCO: Wow! So I think irregardless of who's in the White House, the key is really the split in power. So if you get a Democrat or Republican in the White House, it is clearly important that we have Congress on the other side of the fence. Because when you get that gridlock in Washington, markets tend to do better. That is really the key. Because markets do not like surprises. And therefore, we need that split in power, regardless of who wins.

BRIAN SOZZI: Jose, so then if someone owns 10 shares of NVIDIA after their monster run, are you saying they should rotate out of some of these magnificent seven names because of the geopolitical risk?

JOSE RASCO: Well, if you look at what's happened over the last month, the small-cap markets have done very well, the 14% in December. The broader-- the equal weighted S&P is up 7% and the S&P market weighted is up 4.5% in the last month. So clearly, we're seeing an expansion, a broadening out of the rally. So that bull market sentiment, it's in place for the longer term here.

And if you look at earnings over the next 12 months, US earnings look really good, especially for the NASDAQ. They're very, very comparable to what we're seeing out of M-Asia. So while we like M-Asia, we like the stability of earnings in the US markets. And more importantly, remember when the fed cuts, US markets tend to lead global markets. And this is going back to 1980s. US markets outperform all major global indices when the fed begins to cut.

BRAD SMITH: When we look out to next year and we really assess some of those geopolitical tensions, concerns that the markets are really going to have to consider, as well as balancing that against a fed that we're all anticipating or there's plenty of hopium to go around that there's going to be cuts, multiple cuts that come next year. Then if that is already priced in at some point, because the markets are going to look and try to price it in the best they can six months in advance, where are there other areas, perhaps around the globe, perhaps emerging markets as some investors have even brought up, where in an election year it might be apt to perhaps do some rotation?

JOSE RASCO: Well, number one, we like M-Asia, in particular India. I think the Indian economy and Indian markets look very interesting. Parts of Southeast Asia look interesting as well. But don't fall asleep on the US markets. Because remember-- I don't think we have properly priced in the speed and the pace at which the fed may cut.

Remember, they're still restrictive because they're still doing quantitative tightening. So they have to do something to help alleviate the slowdown in growth that we see coming in the first half of the year. And that could be lower rates.

And in addition, now one thing that we haven't talked about-- we keep talking about the cyclical factors going on in the economy, are they going too slow as we head into '24? There is a secular basis to this as well. We see four major secular themes. Number 1 is the technology boom, the technology revolution that's really going to begin to affect earnings next year.

Number 2 is innovation in health care. And if you look at expectations for earnings next year, health care has really popped up. And I think a lot of that's going to be on cost-cutting innovation, new drugs, new use of drugs, new delivery mechanisms. You're going to see a lot of innovation in 2024.

Number 3 is reindustrialisation of the US economy. If you look at construction spending in manufacturing, it's growing in excess of 73% year-over-year. This is not an emerging market economy. It's the largest and wealthiest economy in the world. And construction in that sector is booming.

And number 4 is onshoring or nearshoring, and that is going to help reduce costs further and it's going to help expand the manufacturing base. And you're going to see a modest uptick in employment because of that.

BRAD SMITH: Jose, how many--

JOSE RASCO: [INAUDIBLE] and labor markets.

BRAD SMITH: Sorry, we've got to hustle to our finish here. But how many rate cuts are you in the camp of? And what is the sector that benefits the most in that instance?

JOSE RASCO: Well, I think-- so we're looking, officially, our view is 75 basis points next year and 75 basis points in 2025. So that gets us to a 4% fed upper bound for the fed. And what we're looking at is the obvious interest rate sensitive sectors that can stand to benefit housing, autos, durables, technology. Financials tend to do well.

The problem with housing is a constriction on supply. So even though inflation is going down and interest rates are going down, that's great for bonds, that's great for credit markets, It's great for the consumer, but the restriction on supply is going to keep the housing market a little more turbulent than we'd like.

BRAD SMITH: One of our reviewers and viewers, I should say, responding in real time saying, he wants more rate cuts. We will see exactly--

BRIAN SOZZI: Don't we all?

BRAD SMITH: I mean, look for those of us looking for a house, we're hoping for as many as--

JOSE RASCO: But remember, the fed surprised us with the pace. This is very similar to '94-95, guys. They surprised us at the aggressiveness on the way up. I would not be shocked to see a lot more than we're forecasting.

BRAD SMITH: Well, we were transitory for so long. So the aggressiveness had to follow in some instance or another. Jose Rasco, chief investment officer of Americas for HSBC Global Private Banking and Wealth. Thanks so much for taking the time. And happy holidays to you, Jose.

JOSE RASCO: Happy holidays. Happy new year.