Investors continue to debate the economy’s path of least resistance as we look to the remainder of 2024. It seems like many market pundits, if not most, are in the soft-landing camp, seduced perhaps by the hypnotic powers of last year’s rising stock market, especially the fourth quarter rate relief rally. It’s a tough call.
You can’t rule out a recession before giving the economy a full two years to react to the tightening of interest rates that began in March of 2022. The good news is we are on course to see 2% inflation, possibly lower, over the course of 2024. The Fed’s preferred inflation gauge is not the consumer price index. It’s the core personal consumption expenditures deflator, which has annualized at a sub 1.9% rate over the past six months.
There is widespread agreement that economic growth will slow this year. The consensus calls for growth of about 1.3%, compared to an estimated 2.4% in 2023. It wouldn’t take too much of an economic speed bump to knock us into recession. With the yield curve inverted and both the purchasing managers’ indices and the Index of Leading Economic Indicators in a prolonged slump, the likelihood of recession is probably 70% or higher. That is why the Fed Funds futures market is pricing in 6 rate cuts this year, totaling 150 basis points. The Fed seems less concerned than the market, hinting at 3 rate cuts for 75 basis points.
Fed tightening cycles have resulted in recessions about 80% of the time, and Jay Powell raised rates more aggressively than anyone since Paul Volcker in the 1980’s. If a recession is in the cards, it will surface this year, probably in the next few months.
It’s not a slam dunk call. Fiscal spending remains $2 trillion higher than pre-pandemic levels and we are still creating new jobs, although at a slowing rate that is likely to deteriorate further.
It’s the debt. We have record levels of debt in every sector: household, government and corporate. The reaction to higher rates has started. Delinquencies are rising. The manufacturing sector has softened, if not stalled. Housing is weakening. Loans in the commercial real estate sector are under duress, especially for office buildings. Despite a 23% rate on most credit card debt, borrowing levels are rising, perhaps out of necessity, and now payments are getting extended.
It’s hard not to think that earnings estimates are too high. Additional headwinds come from weakness abroad and geopolitical tensions, which are once again impacting supply chains. That said, some companies will report strong results this earnings season and there will be pockets of strength in the stock market. Others will be less encouraging and must temper expectations. We would view any pullback in stocks as a buying opportunity for long-term investors.
-Howard F. Ward, CFA
