Earlier this week, we released our 2024 macro and market outlook titled “Stranger in a Strange Landing.”
It argues that instead of having a Hard, Soft, or No Landing, we could have a “Strange Landing” in 2024. This Strange Landing would be characterized by data that continues to disagree and be dislocated, sub-cycles of the economy to be discordant, and policy to create distortions.
There is an incredible amount of information included in this outlook, so we created an Executive Edition of our slide deck that provides quick summaries of our views on the economy and each major asset class.
If you haven’t had a chance to read the outlook letter, you can do so directly below.
NewEdge Wealth 2024 Outlook: Stranger in a Strange Landing
Ample analytical energy has been expended in the great debate about what kind of “Landing” the U.S. economy will experience in 2024.
Will it be a “Soft Landing” where growth remains relatively resilient as inflation falls? Or a “Hard Landing” where growth sputters and unemployment rises? Or a “No Landing” where both growth and inflation remain elevated?
These labels are assigned by investors with historical parallels in mind, like the idolized 1995 soft landing or the 1970s double inflation peaks, grasping to find some semblance of familiarity in this strange post-pandemic economy.
Much like Michael Smith, of Robert A. Heinlein’s 1961 Stranger in a Strange Land, who is a human raised by Martians and arrives on Earth for the first time as a young adult, we find ourselves in a place, or an economy, where we have never really been before.
Though we are nearly four years beyond the pandemic and its unprecedented policy response, the long-tail impacts of 2020’s events are still being felt, resulting in an economic cycle with scant historical similarities and filled with data dislocations, cycle discordance, and policy distortions.
The strangeness of the post-pandemic economy has caused substantial dislocations in economic and market data.
A stark and broad example is the Conference Board’s Leading Economic Indicator (LEI), which is a collection of economic and market data that is expected to “move before changes in the overall economy”, though it is actually proven to be more coincident than leading. Regardless of the timing, the LEI has rarely been so persistently wrong about the real economy: the LEI has been negative for 18 months and remains at lows not seen since the recessions in 2000, 2008, and 2020, all the while U.S. GDP growth has been robust and above trend.
These data dislocations veritably broke economic forecasting in 2023, with consensus incorrectly predicting the recession-that-never-was. Models struggled to differentiate between slowing data that was simply normalizing from pandemic disruptions, and slowing data that was signaling outright economic weakness. Soft/sentiment data flashed warning signs all year, while hard/real data remained resilient. Classic bond market signals about the future path of growth and policy, such as yield curve inversions, were misleading, distorted by the long-tail of unprecedented central bank crisis intervention.
It was not just yield curves that were distorted by the long-tail of aggressive policy intervention, it was also the entire reaction function of corporate and consumer balance sheets to higher rates. In a strange paradox, corporate net interest expense fell in 2023 as the Fed was raising rates (BEA data). After locking in low rates through the QE era, aggregate corporations have benefitted more from the rise in interest income than they have been hurt by higher interest expense as interest rates have risen.
This strange cycle has also been characterized by pockets of the economy experiencing discordant cycles, with some areas experiencing sharp weakness, such as manufacturing and transportation, and other areas experiencing robust strength, such as consumer services. The disjointed cycling of parts the economy sets 2024 up for further uncorrelated rebounds and deteriorations.
All of this dislocation and discordance resulted in conflicting data signals 2023, where subsets of data could tell very different stories about the outlook for the economy. This conflict persists in 2024: for something as important and closely watched as the U.S. labor market, sharply different narratives can be spun about the future outlook for U.S. employment depending on which subset of disagreeing data is used.
To add to the melee of data as we enter 2024, the policy backdrop is unique as well, with the potential for a rare non-recessionary boost from both fiscal and monetary policy.
U.S. fiscal deficit spending as a percentage of GDP remains near levels not seen outside of recessions or wars, while the Federal Reserve is expected to embark on an easing cycle, which at current market pricing implies the largest non-recessionary easing cycle in 40 years (not long after it completed its most rapid hiking cycle in 40 years!).
So instead of Soft, Hard, or No Landing, we posit that 2024 will be a Strange Landing, one filled with continued data dislocations, cycle discordance, and policy distortions.
A Strange Landing is one of potentially sudden changes to data, unexpected market reactions, and a wide range of narratives and prices across asset classes.
In order to traverse this Strange Landing, investors should adopt the following traits (which also happen to be great traits for astronauts):
Vigilance: Complacency could be dangerous in 2024, either by extrapolating recent trends in important data, such as U.S. labor market data, or ignoring “crowded consensus” in market positioning and sentiment (whether we look at equities, credit, or the pricing of Fed rate cuts). One-sided market pricing/narrative that ignores upside or downside risk should be questioned with vigilance.
Selectivity: We see potential for strong returns in selective areas in 2024, with a wide gap between winners and losers across asset classes. Though incrementally easier, the policy backdrop does not support a “rising tide lifts all boats” approach, meaning quality remains key across asset classes. We continue to see opportunity created by disruption in investments/asset classes that have faced headwinds in recent years.
Responsiveness: Data may change quickly over the course of 2024, so outlooks/forecasts will need to respond. Further, we see the potential for wide trading ranges instead of trends over the course of 2024, creating opportunities for investors to be tactically responsive, if appropriate.
It is this last trait that makes us journey from sci-fi to stoicism in finding our market mantra for 2024, a phrase that will be imperative to keep in mind throughout this strange, but fascinating year. Quoting the Greek Stoic philosopher Epictetus:
“It is not what happens to you, but how you react to it that matters.”
When it comes to investing, and the inevitable emotion that comes with market volatility, the best reactions are often those that are planned well in advance and not done in the heat of the moment.
Tactically, a planned reaction could be having a strategy as to how to respond to/take advantage of eventual equity or bond market volatility (to the upside or downside). Strategically, a planned reaction is maintaining or progressing towards a long-term target asset allocation, despite emotional swings, as determined through a robust wealth strategy process. Overall, a planned reaction is identifying what you can control so that you can minimize the negative impact/maximize the positive impact of what you cannot control.
And so, strapping on a space suit toga, we enter 2024 armed with Epictetus to help us navigate an economic and market landscape that could even challenge the imagination of Heinlein.
Welcome to the Strange Landing of 2024.
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