The Recession That Never Was
The U.S. economy seems on the cusp of performing the nearly miraculous feat of a “soft landing.” Inflation is falling without a recession, the stock market is in positive territory, and unemployment hovers at a 50-year low.
And yet, polls show that most Americans believe that the economy is in terrible shape and getting worse. Nearly half think we’re in a recession (we’re not).
Then again, people believe a lot of things without evidence. A National Science Foundation poll found that 26% of Americans believe the sun revolves around the Earth. (Sorry, Copernicus.)
As I’ll explain below, the empirical facts support the bull case. I see opportunities emerging in both stocks and bonds in the fourth quarter of 2023, and well into 2024, from a trifecta of favorable macroeconomic events: inflation cooling, the Fed pausing and eventually cutting rates, and economic and earnings growth picking up speed again.
Don’t just take my word for it. Goldman Sachs (NYSE: GS), an investment bank not known for being Polyannish, published a report on November 9 titled: “Macro Outlook 2024: The Hard Part is Over.”
The report states:
“Goldman Sachs Research expects several tailwinds to global growth in 2024, including strong real household income growth, a smaller drag from monetary and fiscal tightening, a recovery in manufacturing activity, and an increased willingness of central banks to deliver insurance cuts if growth slows.”
The nation’s economy grew at a 4.9% annualized rate in the third quarter, without stoking inflation. Which is not to say that market volatility will soon go away. Federal Reserve Chair Jerome Powell made hawkish comments last Thursday that temporarily spooked investors, sending stocks sharply lower.
However, stocks came roaring back on Friday, as investors shrugged off Powell’s bearish utterances to focus on the market’s sanguine fundamental and technical aspects. U.S. and overseas equities finished last week higher (see table):
Oil prices declined for the third straight week. Worries about China, the world’s number one oil importer, are weighing on crude prices, which is a positive disinflationary trend.
Powell’s dour intimations notwithstanding, the consensus on Wall Street is that the Fed will soon end its tightening campaign and monetary policymakers are simply leaving their options open.
Markets are forward-looking and often start to climb before the end of an economic cycle. The current economic deceleration has been expected for some time, and as growth softens (but remains on track), investors are starting to look toward a recovery period in 2024.
Expectations for descending interest rates in 2024 remain consistent, and long-term yields hover well off their September highs.
Indeed, a major tailwind for stocks is the stabilization of bond yields, as reflected by the recent decline in the benchmark 10-year U.S. Treasury yield (see chart):
The main U.S. stock market indices closed mixed on Monday, as follows:
- DJIA: +0.16%
- S&P 500: -0.08%
- NASDAQ: -0.22%
- Russell 2000: +0.01%
Stocks took a pause, ahead of key inflation data scheduled for release this week. You should use volatility in the months ahead as a buying opportunity. When the inevitable dips occur, leverage them to diversify and add quality investments at more attractive valuations.
As the holiday season gets underway, market leadership appears to favor growth investments, especially mega-cap technology stocks. The waning of interest rate fears has boosted the overall tech sector. Next year, laggards such as real estate investment trusts (REITs) and utilities should rebound, as bond yields continue their descent.
Earnings growth is a major plank in the bull narrative. For Q3 2023, with 92% of S&P 500 companies reporting actual results, 81% of companies have reported a positive earnings surprise and 61% have reported a positive revenue surprise, according to the research firm FactSet.
For Q3 2023, the blended year-over-year earnings growth rate for the S&P 500 is 4.1%. This level of earnings growth marks steady improvement. On September 30, the estimated year-over-year earnings decline for the S&P 500 for Q3 was -0.3%.
The week ahead…
We’ve benefited from a third-quarter earnings season that’s better than expected. This week, we’ll get insights into consumer spending trends, with large bellwether retailers, such as Walmart (NYSE: WMT), Target (NYSE: TGT) and Home Depot (NYSE: HD), scheduled to report.
The following economic reports are on the docket: NFIB optimism index, consumer price index (Tuesday); producer price index, retail sales (Wednesday); industrial production, homebuilder confidence index (Thursday); housing starts and building permits (Friday).
Throughout the week, several Fed officials are scheduled to make public remarks, so…buckle up. These monetary minions use such occasions to float trial balloons about policy and their words are carefully parsed by The Street. The market could get a bit choppy.
Spooked by volatility? For market-thumping gains with mitigated risk, I suggest you consider the advice of my colleague Jim Pearce, chief investment strategist of Personal Finance.
Personal Finance, founded in 1974, is our flagship publication and it has helped investors build wealth for nearly 50 years.
Case in point: If you had taken the initial recommendation of Personal Finance to buy Chevron (NYSE: CVX), and held on, you’d be sitting on a whopping return of nearly 3,200% (that’s not a typo).
Want to get aboard “The Next Chevron?” Click here for details.
John Persinos is the editorial director of Investing Daily.