A Recession in 2024?
You know folks, investing on Wall Street has been a nail biting adventure for many Americans since the beginning of 2020. Of course it all started with COVID, which has many experts debating if it constituted a “black swan” event or of this is just the “new normal” for our world. The stock market had just peaked in February 2020 before the outbreak of Covid-19. The pandemic ended up having a significant impact on the world economy, leading to unprecedented volatility and uncertainty that lingers to this day.
And while the stock market enjoyed a solid recovery in 2021 as most of the world started to reopen, optimism started to decline in 2022 due to U.S. political tensions and the global impact of China’s pandemic response. In fact, in 2022 Wall Street experienced its worst year since 2008’s Great Recession. The S&P 500 index fell 19.4%, and the Down Jones Industrial Average fell 8.9%. Tech stocks were some of the worst performers, down between 22% and 66%₁.
With major economic indicators such as the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite indices jumping all over the place in recent years, many investors are still on edge and anxiously hoping that a recession is not lurking just around the corner. I am regularly asked if I believe we are in for a recession in 2024, so I want to take our time this week to look at some of the factors that often predate a recession and what tomorrow may hold for the markets.
Of course, it is expected that we will experience market volatility when investing in securities. But it can be helpful to look at certain indicators to may help us determine where to invest our money in anticipation of future market trends. For example, there are a number of common economic trends that offer insights into the possibility of a recession. One such “recession barometer” is called the Conference Board Leading Economic Index (LEI), which evaluates select metrics, economic data points, and forecasting tools that consider long-term correlations with moves in the stock market.
As the Conference Board tells us, "The LEI is a predictive variable that anticipates (or "leads") turning points in the business cycle by around seven months." In other words, the LEI may help to signal economic weakness prior to an official recession being declared by the National Bureau of Economic Research₂.
So just how does the LEI process work? Well, it contains 10 inputs and is reported monthly. Three of its inputs are financial in nature and include the proprietary Leading Credit Index and performance of the S&P 500 index. The remaining seven inputs are nonfinancial and feature data points on average weekly manufacturing hours, average weekly initial unemployment insurance claims, and the ISM Manufacturing New Orders Index, to name a few. I know, that’s a lot of industry jargon!
But folks, it’s not important that you understand all of the intricate details of each of these potential indicators, but it does help to have an understanding of what industry experts are saying about our chances for a recession in the coming year. And accordng to the LEI, their analysis suggests that a recession is likely in 2024. And they’re not the only one in their prediction.
Another widely followed metric with a strong track record of success also signals a high likelihood of recession - the Federal Reserve Bank of New York's recession probability tool. The NY Fed's predictive tool examines the spread (i.e., difference in yield) between the 10-year Treasury bond and three-month Treasury bill to determine how likely it is that a recession will take place in the coming 12 months.
With the yield-curve inversion hitting its steepest point in roughly four decades, the New York Fed's tool is forecasting a nearly 63% probability of a recession taking place by or before December 2024₃.
Of course, these are predictions only and there is no such thing as a foolproof indicator. In fact, there are other industry experts who suggest just the opposite. According to a recent Forbes article, Fitch Ratings’ Chief Economist Brian Coulton said the credit rating agency no longer forecasts a U.S. recession in 2024. This change in tone is reportedly due to various indicators of economic strength₄. According to the article, despite LEI indicators signals above, a recussion has not occurred. They believe that, “The U.S. economy has been extremely resilient in recent years, bolstered by continuous economic stimulus, ranging from direct payments to individuals and businesses amidst the pandemic to massive deficit spending by the government.”
Cutter Family Finance faithful, what these “barometers” are doing is trying to predict the future movement of the markets and the economy. This is a task that just isn’t possible with any level of certainty. But we can look to them for hints at what might follow to help guide our own investment strategy. Regardless of which indicator you feel better anticipates the future, it seems that it would be prudent to proceed with caution in 2024. Our markets are complex and it’s much more difficult to predict market movements in the short-term.
For the ten, yes ten years I have been writing this column, you know that a sound retirement system must first combines both strategtic and tactical asset management. This coupled with a downside risk mitigation system using quantative data that may just put you in the highest probability of financial success. It offers you the benefit of time to help weather short-term market fluctuation with confidence, knowing you have a plan that anticipates – and expects – market volatility. What’s your program? Do you have one? Should you?
And as always - be vigilant and stay alert, because you deserve more!
Have a great week.
Jeff Cutter, CPA/PFS is President of Cutter Financial Group, LLC, an SEC Registered Investment Advisor with offices in Falmouth, Duxbury, and Mansfield, MA. Insurance offered through its affiliate, CutterInsure, Inc.
We do not offer tax or legal advice. Jeff can be reached at jeff@cutterfinancialgroup.com. This information is intended to provide general information. It is not intended to offer or deliver investment advice in any way. Information regarding investment services is provided solely to gain a better understanding of the subject of the article. Different types of investments involve varying degrees of risk, including the potential for loss. Therefore, it should not be assumed that future performance of any specific investment or investment strategy will be profitable. Insurance product guarantees are backed by the financial strength and claims-paying ability of the issuing company. Market data and other cited or linked-to content is based on generally available information and is believed to be reliable. Cutter Financial does not guarantee the performance of any investment or the accuracy of the information contained in this article. Cutter Financial will provide all prospective clients with a copy of Cutter Financial’s Form ADV 2A, Appendix 1, applicable Form ADV 2Bs and Form CRS as well as the firm privacy policy. Please contact us to request a free copy via .pdf or hardcopy. 1. http://tinyurl.com/2bvayj2r 2. http://tinyurl.com/ckypurrw 3. Ibid 4. http://tinyurl.com/35jh38e5
