Economic Crossroads
SUMMARY:
Despite robust economic data, including historically low unemployment and strong wages, a sense of pessimism permeates many Americans’ outlook on the economy.
OUR PERSPECTIVE:
The economy has held steady over the past year, with most economic indicators waving green flags. While we remain optimistic about the potential for a soft landing, we still err on the side of caution and maintain a defensive stance as markets bake in the potential for rate cuts over the next two to three years
SILENT RECESSION
During the pandemic, many firms felt the woes of ‘quiet quitting,’ that is, employees checking out of their roles and working the bare minimum. Companies then faced the Great Resignation where employees voluntarily left their jobs due to lack of opportunities, benefits, or hybrid status. As we enter 2024, many Americans believe we’re in a ‘silent recession,’ where markets continue to hit highs and employment remains strong, but consumers feel they’re living in an economic downturn. A 2023 LendingClub report showed that nearly 62% of households live paycheck to paycheck. Delinquency rates on credit card loans have jumped nearly 93% since third quarter 2021. While still nowhere near the peaks during the 2008 financial crisis, it certainly does lend to the fact that Americans at some level are struggling. The University of Michigan Consumer Sentiment Index has been flirting with historical lows. For reference, the index bottomed out during the 2008 crisis at 55.3 but mostly hovered in the high 50s. As of late, the index read 61.3, trending downwards. It’s fair to say that high interest rates and persistent inflation have been wearing pocketbooks thin over the last year. However, at the most recent Federal Open Market Committee (FOMC) meeting, the Federal Reserve (Fed) paused its most aggressive rate hikes in recent decades, remarking that inflation has eased over the past year but remains elevated. At this time, it appears that the rate hike cycle is complete. The Fed dot plot projects the potential for three rate cuts this year with more to follow in 2025 and 2026. While rate forecasts can change, we expect the overall fed funds rate and year-over-year inflation to fall in the mid to low 2% range. These coupled financial metrics should give consumers more confidence in our economy while inflation eventually normalizes. Prices may not decrease but will feel more normal, especially with wage increases.
POTENTIAL FOR LIQUIDITY INFLUX
The Fed’s aggressive rate hikes left many investors feeling as if they were between a rock and a hard place. Fixed income asset valuations decreased with the rise of rates, and equities remained volatile as economic uncertainty persisted. Investors sought places to park cash while capturing some income. Money markets became the go-to investment vehicle since the second quarter of 2022. At nearly $6 trillion, total money market fund assets exceed levels during the 2008 crisis by over $2 trillion. With some short-term money market rates well above 5%, these accounts offer investors the perfect place to maintain the time value of their cash and earn a little extra. However, with the potential for interest rate cuts over the next three years, money market rates will likely decrease, leaving investors searching for products with higher returns. This could push some to enter the fixed income and equity markets over the next several quarters. With current elevated rates and company valuations, these create attractive purchase opportunities for investors.
…MARKETS CONTINUE TO HIT HIGHS AND EMPLOYMENT REMAINS STRONG, BUT CONSUMERS FEEL THEY’RE LIVING IN AN ECONOMIC DOWNTURN
ROBUST EMPLOYMENT SIGNALS ECONOMIC STRENGTH
The U.S. labor force takes on significance when evaluating the health of our overall economy. The unemployment rate remains strong and has not surpassed 4.0% in the last 12 months, edging down to 3.7% in December’s most recent data. Average hourly earnings continue to rise month-over-month, as well. So, despite the weight of high interest rates and consumer prices, the employment market remains strong and shows no sign of slowing down.