To The Moon

US slips into Recession in 2024?

For much of 2022, recession fears have been building against a sharp rise in interest rates and market uncertainty.

Of late, has there been a shift in sentiment.

With a resilient US economy, a growing number of investors are seeing an increasing likelihood of a “soft landing” —where the Fed raises interest rates to combat inflation without triggering a recession.

However, many remain cautious.

Below shows US economic forecasts for 2024, across (1) Wall Street, (2) Main Street, & (3) C-Suite.

Do you recall, In July 2023 the Fed announced that they were no longer forecasting a recession in 2024, marking a sharp departure from earlier projections.

On hindsight, does the Fed know what they were talking about 4 months ago?

While the Fed staff continue to share a brighter outlook, the yield curve spread between 10-year and 3-month Treasury rates suggests there is a 61% chance of a recession in the 12 months ahead.

Historically, the yield curve has been a reliable predictor of recessions, based on a New York Fed model that uses data from 1959-2009.

(1) Wall Street.

• Survey of economists by Wolters Kluwer shows that the analysts themselves are split.

• 48% calling for a recession over the next 12 months.

(2) Main Street.

Across Main Street, consumers share a more cautious sentiment, with >69% saying that a recession is likely next year, based on a Conference Board survey.

(3) C-Suite.

Yet corners of America’s C-suite have grown more positive.

$Goldman Sachs(GS)$ recently dropped its recession forecast to a 15% probability, while $Bank of America(BAC)$ gives it a 35-40% odds.

On the other hand, 84% of CEOs are preparing for a recession in the next 12-18 months, a drop from 92% seen in the Q2 2023.

Above information summary table

Among the many key factors that affect US economy, investors are watching very closely the impact of higher / elevated interest rates.

Afterall, wasn’t the threat of high interest rate, the oft-incited “fear” that Wall Street has subjected everyone to in 2022?

Seven times in total, each time the Fed raised the Fed fund rate !

High interest rates: Bull vs Bear:

For the bull case:

• Higher rates appear as though they have not significantly impacted consumer spending yet.

• Although spending has slowed on non-essential items.

• Retail sales continue to be solid.

• Earnings across $Home Depot(HD)$, $Wal-Mart(WMT)$, $Lowe's(LOW)$ and other major retailers show resilience.

• Where main changes are occurring are with consumers purchasing more affordable options.

However, consumers are relying increasingly on borrowing to fund their spendings. (see below)

This, to me is not a good sign and definitely not prudent home economics.

For the bear case:

• Household debt has hit record highs of $17 trillion in March 2023, rising +19% YoY.

• Higher rates have led these borrowing costs to jump, likely affecting household budgets.

• At the same time, corporate defaults have accelerated in 2023, and are projected to keep rising. (see below)

S&P Global Raings Credit Research and Insights report

• The S&P Global Ratings Credit Research & Insights expects the US trailing-12-month speculative-grade corporate default rate to reach 5% by September 2024, from 4.1% (September 2023).

• They expect defaults to continue rising as corporate entities grapple with higher interest rates for what might be a longer haul ahead.

• Rising rates will be compounded by slower growth ahead, straining many firms at the lowest ratings already showing negative cash flow to debt.

In 2024, will a US recession affects US stock market?

After reading the “experts’” opinions and views, here is my take: (mine & mine only)

• Whether a country slips into recession, it will not be due to a single but a few key factors.

• Each key factor may or may not create further ripples’ effects.

• Like a human, every part of the body needs to be in good condition in order for a person to thrive.

• It is the same for any country’s economy.

• Both public & private sectors need to run like well-oiled machines in order for US to thrive and in the process, its stock market as well.

• For starters, the US government could get its act together, (a) spend within its current-revised debt limit and (b) maybe even reduce its debt in the process - that would be a step in the right direction.

• Government and Central bank working closely together to maintain prudent fiscal policies (that includes interest rates) to harmonize & revitalize the economy are desirable.

• As of end October 2023, all official reports released seemed to point to (to me!) an easing inflation rate with mild backlash to the economy eg. tight labour market, higher costs of doing businesses etc…

• Unless something drastic comes along that alters the course of diminishing inflation rate in the US and its economy, based on official reports released so far, a recession does not appear to be on the card.

• At least not for first half of 2024, in my humble opinion (then again what do I know? LOL!).

• Do you think US will slip into a recession in 2024?

• Do you think there is any link between US economic status (eg. in recession) and the US stock market?

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