2024 Investment Outlook

Key Takeaways:

1.     Deficits and debts

2.     Unchanged outlook

3.     Inflation, inflation and inflation

An Overview of the Current Environment:

Our investment framework, as you may recall, uses a four-quadrant approach and is based on the incremental rate of change in both GDP and inflation.  Last year, our investment outlook predicted a strong probability of recession, which has not happened (yet).  However, a recessionary environment still looks like the most probable outcome for the first quarter.  Our investment framework currently indicates a 72% probability of a recessionary environment in Q1 2024.

*Hedgeye

There was no recession in 2023 because of government spending and new government jobs. This can be found by looking at Nominal GDP, which increased by $1.202T, and the Government deficit which increased by $1.274T. Government spending increased every quarter last year and accelerated faster than personal consumption in the last two quarters.  We do not see government spending slowing down, especially since we are in an election year with uncapped commitments, which one can reason that deficits will continue to grow.

As for jobs, government employment contributed to 23.7% of all non-farm jobs created in 2023.  Government employment historically has been less than 10% of overall job creation.  Strong Government spending and job growth cloud the economic reality in the private sector.  Eventually, Government job hiring will slow down, and we may be looking at a more traditionally deflation/disinflation-type environment.

 Our Investment Process:

Our risk management process is built on growth, inflation, and policy. Tracking these variables allows us to position assets with the highest risk-adjusted returns. Specifically, we are tracking the rate of change between growth and inflation. Let’s dive into some of the data and take a deeper look at growth, inflation, and policy.

Looking at growth –

Outlook remains unchanged, with global growth to be slowing down. Additionally, continued war in Ukraine, conflicts in the Middle East, and a potential new spike in COVID cases could cause major headwinds for developed countries like the US. Data in the US shows that US consumers have spent down all their savings, and credit card balances are at all-time highs. Government spending, which was a tailwind for the markets this last year, will become a headwind for growth.  We remain defensively positioned at the start of 2024.   

Looking at inflation –

Inflation peaked in 2022 as the surge in demand for goods and services eased; however, the core components of inflation remain uncomfortably high.  Specifically, labor and shelter values are not coming down fast enough. The shelter component to inflation is starting to show signs of weakness, but nothing definitive, and as long as inventory numbers stay low, uncertainty remains high.  Even though we have seen inflation rates start to come down, today’s CPI print shows that we are still not close to the Fed target of 2%. Overall, inflation will remain a problem since it will be high enough for the Fed to continue its policy path of fiscal tightening while facing recessionary data. We remain in higher credit qualities and low-duration bonds.

Looking at Policy –

A few months back, the Fed was focused on the amount of debt the government has coming due and the ability to refinance at higher rates and what that means for the Treasury supply overall. We believe the Fed will continue to focus on this trend in 2024 with fewer foreign buyers of Treasuries and banks starting to unload their Treasury holdings due to higher interest rates.  Simply put, if growth slows down, both legislators and the Fed will create free money to prop up the economy, and we may face another wave of inflation.  If growth continues and the “Fed pivot” seems increasingly unlikely, we may see higher rates for longer and less demand for Treasuries at a time when the supply of treasuries is abundant. Further supporting higher rates for longer.  

CFC One Portfolio:

My Opinion: I don’t have a crystal ball but the 2024 economic outlook for the United States will be defined by rapid monetary tightening and moderating inflation. My best guess is that if we see a recession (a “hard landing”), we can expect lower interest rates, resulting in a rush to safe heaven bond investments and a significant stock market decline.  Recessions are typically bad for stocks, with average drawdowns exceeding 30%. If we see a stock market decline, though, I think the Fed will act quickly, making a recession less severe and shorter.  And if we see moderate growth, no Fed rate cuts, or even a rate increase, that will shatter the market’s view of a soft landing and prompt lower market returns for both stocks and bonds.  Either way, there will be a period of pain in 2024 followed by a potential for a large swing up.  Therefore, having defensive positions today has helped capture most of the upsides of an irrational equity market while protecting the downside in this very uncertain world. For clients, I look forward to discussing how this environment impacts your financial picture in the coming weeks.

Not a Client? Explore Our Approach

If you're not currently a client and seek insights into how we adjust our portfolios to help our clients reach their goals, please watch this video. We invite you to schedule a portfolio review, where we can assess risks, economic impacts, and align them with your financial goals. In a dynamic 2024, understanding the nuanced economic landscape is paramount to informed investment decisions. If you are interested, please schedule a review of your current investments.