Will 2024 give us the soft landing in the economy that we’ve all been hoping for? While this seems possible there are, as always, risks that remain. In 2023 we had quite resilient consumer spending, business investment was still robust and an eventual stabilization of the housing market. Corporate profits grew more than expected as businesses were able to use pricing power and overall demand to boost revenues.
It is possible that 2024 will bring us more of the same, but perhaps at not such a robust level. Consumer spending may fall off a bit driven by a slightly weaker labor market and that might make businesses look more to controlling the bottom line with spending cuts. That said, it doesn’t appear that unemployment is set to rise steeply, at least not until the next recession, whenever that might be.
Overseas there is optimism that European and Asian economies will continue to rebound. While 2023 was led by India, Japan and a number of Asian economies outside of China 2024 may see the Chinese economy respond more directly to their domestic stimulus measures. Europe as well may see a rebound in their economies following the sharp contractions they have experienced over the last couple of years.
There is certainly the potential for shocks as we look ahead. Geopolitical uncertainty, the US election cycle and uncertainty about what the Fed will do about interest rates leaves room for a potential recession. The yield curve is still inverted with short rates considerably higher than longer term interest rates. While short rates may come down through the year given the latest guidance from the Fed we’ll just have to wait and see just when those rates cuts occur.
The Leading Economic Indicators were negative again in November 2023 when considered year over year however the 6-month numbers were less negative than they had been earlier. The Conference Board, those folks who maintain the LEI, do predict a shallow recession in the first half of 2024.
Looking at portfolios it is always useful to think about the seemingly perverse incentives that equity and bond markets respond to. Slowing economic growth may cause the Fed to cut rates more quickly than they might otherwise and lower interest rates are a direct contributor to higher prices for both stocks and bonds. While a shallow recession isn’t the best news from an economic perspective on Main Street it could cheer stock and bond investors on Wall Street if corporate profits hold up during that time.
This is a great time of year to consider overall portfolio allocations in light of income needs and other projected cash flows. If you have questions about your specific portfolio, don’t hesitate to contact us and we’ll be happy to discuss your overall positioning.
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