Jason's World

After a year that saw markets and the economy wildly outperform initial expectations, forecasts for 2024 are rather grim compared to last year’s performance, but are nowhere near as bad as the beginning-of-the year forecasts last year. Forecasters’ estimates of the S&P’s direction this year ranged from a -30.8% drop to a 17% gain, a rather depressing range when compared to the brilliant over performances of last year.

Many signs point to a recession in the US, and most analysts forecasted a continued slowdown in China despite the introduction of growing stimulus measures. Given the fact that an economic catastrophe was predicted in 2023 and then averted, some may grow skeptical of further forecasts of economic downturn. However, the private services sector shows signs of faltering. The sensitivity of this sector to recessions has no doubt set off alarm bells for many. This has prompted some analysts to forecast that a recession is likely for 2024. “The recession is just delayed, but not completely removed,” said Kathy Bostjancic, chief economist at Nationwide Mutual. Bostjancic forecasts that the unemployment rate will top 5% in the third quarter, compared to the Fed’s median forecast of about 4%. This shows that lingering anxiety about the economy remains despite the Fed’s projections and widespread optimism for rate cuts this year.

Part of the reason why a predicted recession has not come to fruition in 2023 is that past studies have undercounted just how much savings Americans have saved up from the pandemic. Despite earlier forecasts showing that Americans were supposed to run out of extra pandemic savings around September and October of last year, newer studies last year show that the savings of American consumers and businesses were more solid than previously thought.

But as with many good things, they don’t last forever. Though bank deposits remain above prepandemic levels, the sentiments of American consumers, while showing signs of improvement, remain below where they were before the pandemic, driven by inflation that remains above target and record-high house prices. Consumers are also starting to feel pressure from sky-high credit card debt as interest rates remain high. The increasing payments on credit cards and car loans are driving delinquencies to high levels, with auto delinquencies reaching rates above prepandemic levels. Though the probability of a recession remains below 50%, the consensus among economists and businesses is that after a year that wildly outperformed expectations, this year is likely to feel a lot like a recession even if there isn’t one. 

Professional workers might be familiar with this feeling that the economy isn’t doing as well as the data might suggest. And judging by recent events, there’s more to come in 2024. A mix of finance and tech firms announced layoffs recently, with Google planning to cut 20,000 jobs by the end of 2026, a more than 10% reduction in its workforce. Companies have slowed expansion and hiring plans as a result of higher interest rates. As companies continue to look for ways to improve efficiency and cut costs amid continuing pressure from an elevated interest rate environment, this trend seems poised to continue well into the year.

Despite this, indices have rallied to record highs in the recent week. The activity since the beginning of the year appears to be a microcosm of what happened in 2023-mass panic followed by relief and jubilation. The rally was powered by reports that the inflation outlook has been lowered. Consumer sentiments have shown an increase across political lines. The inflation outlook has reduced to its lowest level since December 2020. 

But the brief boost might be illusory, and those predicting that the bears will be wrong again in 2024 should hold their breath. Consumer spending being much higher than expected was the prime driver of stronger-than-expected growth in 2023, but with the growing burden of credit card debt being made worse by high interest rates, an increasing wave in layoffs and tech reaching record highs, it would be very hard to find further fuel to push the stock market up that much further. Soon we may come to a point where we’ve gone up so much that the only way to go would be down. 

There are a few possible shocks that might trigger a reevaluation of market conditions. For example, the victory of the anti-China Democratic Progressive Party (DPP) in Taiwan’s presidential election may add to the rising tensions between China and Taiwan. The reason why Taiwan is so important to the tech industry is that the vast majority of semiconductors used around the world are manufactured in Taiwan. While there are efforts to bring semiconductor manufacturing to the United States, some of them have stalled as of late. A war might be unlikely this year, but an accident involving Taiwanese and Chinese troops will lead to widespread panic even if a war does not ensue. Even before the Taiwanese elections took place, China has been exerting growing military pressure on the island. 

However, these shocks may be far out of mind right now, with markets entering a second phase of the AI rally in the later weeks of January. Microsoft, seen as the biggest beneficiary of AI owing to its close partnership with OpenAI, widely regarded as the cornerstone that the modern AI revolution was built on, recently saw its market cap approach $3 trillion with a share price exceeding $400 per share at times.

Overall, I wouldn’t buy in too much on the hype in the markets right now. While things seem to be going well now, they have been going on for so much longer than expected that anything that is less than a perfectly rosy soft-landing scenario with decent growth and low inflation would cause a retreat in the stock market. And with so many things that could go wrong at this moment, don’t hold your breath for a repeat of 2023.