A year ago, growth forecasts in the United States for 2023 were close to zero, with a possible slowdown in the third or fourth quarter. A break in monetary tightening, or even a first rate cut, is enough to consider. As a result, the American economy ended 2023 with growth of 2.5%, growth that accelerated to 3.3% (at an annualized rate) in the fourth quarter. And the American central bank (Fed) has increased its key rates by 100 basis points.
“The hallmark of 2023 is that the consensus was systematically wrong”Christophe Dembick, Investment Advisor at Pictet AM recognizes “ And this is an issue that will be important for 2024. This fear of a recession is not new: many economists were already predicting it for 2022, then certainly for 2023. What for 2024? This is again the main question.
“Logically, the economy should fall into recession after such fiscal tightening, even if it has no effect on growth and employment in the United States. It is important to understand what went wrong in the run-up to the year 2024. Julien-Pierre Nouen, director of economic studies at Lazard Gaston, explains. However, leading indicators (PMI) predicted the worst. “But we’ve never had such a distinction between leading indicators and coincident indicators (which measure the reality of activity, editor’s note).”The expert explains.
Employment remains a key variable
How did the United States survive a recession after the Fed raised key rates by 500 basis points in two years? Actually, there are many explanations. The surprising resilience of the job market first made it possible to support consumer spending and ward off fears of recession.
Especially since American families amassed a $2,000 billion nest egg during the pandemic, from which they drew heavily. These employment tensions are a consequence of the health crisis and relief measures that have deeply distorted the economy. When the economy reopened, many sectors affected by Covid had difficulty recruiting. “The labor market will be a key variable to watch”Julien-Pierre Nouen warns.
Buy the full view
Another positive element: Financial burden on companies reduced in 2023. They logically took advantage of low rates to borrow before the pandemic and eventually refinanced some in 2023. They were also able to invest their cash in financial products at a rate of 5%! Market conditions for businesses have also improved. In fact, the relative good health of firms is an anomaly in terms of strict rates.
Finally, the massive fiscal stimulus package of the Inflation Reduction Act (IRA) ($370 billion over ten years) drove investment to new heights. Finally, “2023 will have the appearance and credibility of a full view of the soft landing (soft landing) of the economy”, Summarizes the manager.
“Is this believable? We think this is believable, even if a change in recession remains the most likely., in advance, cautiously, Julien-Pierre Nouen. The American economy has no shortage of elements of fragility, such as a residential construction market that appears sluggish due to an unsold stock of new homes, late payments on credit cards that are rising again, and a job market that is picking up. Runs out of steam, even as numerous statistics in this field become less and less readable.
For the moment, with the S&P 500 stock index at its all-time high (+20%), stock markets have clearly bought the best of all world scenarios, ie, moderate growth, no compensating inflation, positive results as businesses and banks ease their lending conditions. starts doing.
Bond markets expect the worst
Interest rate markets do not believe in this scenario. “Bond markets have been pricing in bearish conditions for several months,” Underlines Benoit Peloil, Investment Director of Natixis Wealth Management (WM). An inversion of the yield curve (short rates over long rates) usually heralds a recession within 16 months to 20 months. “About 90% of the various segments of the yield curve are inverted. That is a very strong signal.”Warns the strategist.
Market expectations (which were also seriously wrong about rates in 2023) say the same thing: they are counting on a 150 basis point cut in key rates in 2024. “Historically, a decline of this magnitude is a transition into recession”, recalls Benoît Peloil. This reinforces the attractiveness of bond markets, which have always performed well after interest rate peaks have passed, as seems to be the case.
Better than good
However, American growth should still be there in 2024, but at a slower pace (1.2%, below potential growth). Inflation was allowed to fall in the last three months of 2023 without penalizing growth. A scenario that looks like this soft landing is so hoped for by the Fed. Confidence in the economy has also returned, particularly with a strong increase in consumer sentiment. Airlines are in full swing during the holiday season and non-cyclical consumer giants are posting strong profits.
Suddenly, the risk of recession, which no one excludes but which no one highlights either, is no longer a scarecrow. Without the risk of seeing an explosion in default rates at the best sign, interest rate markets remain attractive in terms of both carry and capital gains in the event of a rate cut.
As for stocks, the flow in the American market will continue to recycle, which is always predicted for the “magnificent 7” (Apple, Tesla, Microsoft, Nvidia, Meta, Alphabet, Amazon), which alone contributed to the performance of the S&P. 500 last year. After taking profits at the start of the year, these stocks, with the exception of Tesla, fell as much as 12% on Thursday. “These values are essential in the stock market and will be a feature of 2024”Raises Christopher Dembic
