A Dozen Reasons To Be Bearish In 2024 (Not!)
Audio Brief
Show transcript
This episode covers a cautiously optimistic outlook for 2024, forecasting continued economic and market resilience despite persistent geopolitical risks.
This discussion highlights three key takeaways.
First, base investment strategy on economic reality, not just fear. Historical data shows major stock market downturns are almost exclusively tied to recessions. With no US recession, termed the "Godot recession," expected in 2024, the S&P 500 is targeted at 5400, suggesting a positive year for equities.
Second, analyze economic data with nuance, looking past misleading headline indicators. Weakness in leading economic indicators is often biased towards the goods sector, which has experienced a "rolling recession." However, the larger services economy remains robust, more than offsetting this weakness and driving overall growth.
Third, expect a patient and cautious Federal Reserve, unlikely to cut interest rates aggressively. Inflation is believed to be moderating and proving "transitory after all." The economy demonstrates strength at current interest rate levels, which are seen as a return to normal, not an emergency. The Fed is projected to deliver only two to three rate cuts, significantly fewer than current market expectations.
This outlook emphasizes sustained market resilience and economic adaptability amidst a persistently challenging global landscape.
Episode Overview
- The speaker presents a cautiously optimistic outlook for 2024, branding it another year of "living dangerously" due to persistent geopolitical risks, yet forecasting continued economic and market resilience.
- The core forecast is for no US recession (the "Godot recession") and an S&P 500 target of 5400, driven by a strong consumer, robust labor market, and rising real wages.
- Inflation is believed to be moderating and proving "transitory after all," which will lead to a cautious Federal Reserve delivering only two to three rate cuts, far fewer than market expectations.
- Weakness in leading economic indicators is dismissed as misleading, attributed to a "rolling recession" in the goods sector that is more than offset by the strength of the larger services economy.
Key Concepts
- Living Dangerously: A theme describing the current era where the economy and markets have successfully navigated major crises like the pandemic, war, and inflation, with significant geopolitical risks persisting into 2024.
- The "Godot Recession": The term used for the widely anticipated recession that has consistently failed to materialize and is not expected to arrive in 2024.
- Historical Market Performance: The observation that major stock market downturns are almost exclusively tied to economic recessions, meaning the absence of a recession strongly favors a positive year for equities.
- Rolling Recession: The framework explaining that the goods-producing side of the economy has experienced a downturn, biasing leading indicators negatively, while the larger services sector remains robust and continues to drive overall growth.
- Return to Normal Interest Rates: The view that current interest rate levels are not an emergency but a return to a more historically normal environment that the economy is strong enough to handle.
- Market Psychology: The idea that a "Depression mentality" often causes persistent market fear of a major crash, even when underlying economic fundamentals are solid.
Quotes
- At 2:22 - "The question about 2024 is, is it going to be another year of living dangerously? And I think the answer is, of course it is." - Yardeni sets the theme for his 2024 outlook, acknowledging that major geopolitical risks remain.
- At 4:20 - "...the Godot recession, as we called it. It didn't show up in 2022, it didn't show up in 2023. I don't think it's going to show up in 2024." - He reiterates his long-held view that the widely anticipated recession will once again fail to materialize.
- At 12:35 - "Why mess with a good thing? If the economy can deal with interest rates at this level, why lower interest rates aggressively?" - He explains his rationale for expecting fewer Fed rate cuts than the market, arguing the economy is strong enough to handle current rates.
- At 16:17 - "Downturns tend to occur during recessions... other than that, the stock market tends to have a solid upward trend." - Analyzing a long-term chart of the S&P 500 and highlighting that major market drops are historically linked to economic recessions.
- At 19:10 - "We increasingly have thought over the over the past several months that inflation has turned out to be transitory after all and not persistent." - Stating his view that the inflation surge is subsiding as predicted, which supports a less aggressive Federal Reserve policy.
- At 23:51 - "Our point has been that the leading indicator is very biased towards goods... We've said that we're in a rolling recession in the goods market... but services are more than offsetting that." - Explaining why negative leading indicators have failed to predict a broader recession.
Takeaways
- Base investment strategy on economic reality, not just fear; historical data shows that in the absence of a recession, the stock market's path of least resistance is upward.
- Analyze economic data with nuance by looking past misleading headline indicators, such as the LEI, to recognize the underlying strength in the dominant services sector.
- Expect a patient and cautious Federal Reserve that is unlikely to cut interest rates aggressively as long as the economy remains resilient and can function well at current rate levels.
