Financial Industry Insights from Advisors Asset Management


AAM Viewpoints — Macro Trends Could Still Haunt 2024

There’s an old axiom in the financial markets: “This time is different” …but it almost never is. History doesn’t necessarily repeat itself in the financial world but usually rhymes with previous economic cycles. Our goal is to flesh out the real possibility of avoiding an economic slowdown in the U.S. in 2024 amidst record tightening by the Federal Reserve (Fed) in 2023. The consensus of Wall Street analysts’ opinions is firmly in the “soft landing” camp, congratulating the Fed on a successful effort to slay inflation without pushing the economy into a recession.

On the other hand, history is very clear that the Fed has only achieved one soft landing in the past five decades and that was back in 1996. The fact of the matter is that the macro trends in periods similar to now show an overwhelming probability of a recession occurring. Timing being what it is, precise policy adjustments calculated to achieve a bullseye for the U.S. economy is like steering the Titanic to miss the iceberg; it is difficult, if not nearly impossible, to achieve. Forecasting a “soft landing” in 2024 is the quintessential forecast of “this time is different.” We are not saying it couldn’t happen, but we are saying that it could be worthwhile to consider the following macro trends before you are all in on the Fed “sticking the landing.”

Valuation is the first thing to consider when looking at the potential for a “soft landing.” Even in the most optimistic scenarios, the S&P 500 Index’s fair value for 2024 is ALREADY around current levels, meaning that a perfect “soft landing” scenario is already fully priced in. The most unexpected market event in 2023 was that equity prices rose not because revenues rose but rose solely due to multiple expansion. Is it possible for all the optimism to be borne out in 2024 and earnings grow into the “priced for perfection” valuation? Of course, it is possible, but data going back to 1950 shows it hasn’t happened. Current analysts’ earnings growth estimates for the U.S. in 2024 is just 1–1.5%. This is hardly what is required to grow into the current S&P valuation. Economic conditions have been deteriorating, not gaining momentum.

The ugly truth about 2023 is that only seven stocks accounted for nearly all the increase in the S&P 500 as well as the NASDAQ 100 and provided a cumulative return in 2023 of 75%. They also now make up roughly 30% of the S&P 500 while the other 493 companies make up the remaining 70%. We learned a very valuable lesson in the late ‘60s/early ‘70s (Nifty Fifty) and again in the ‘90s (.com era): Whenever a small group of companies become a large part of the largest, most liquid index of companies in the world and are awarded significantly higher valuations, the index has always ended up performing very badly. Could it be that this time it is different?

big tech stocks have jumped 75% in 2023
Past performance is not indicative of future results.

Liz Ann Sonders, Chief Market Strategist of Charles Schwab, notes that the U.S. economy has been a “tale of rolling” recessions. Many of the key economic indicators have rolled over. These included the housing market, ISM Manufacturing, The Conference Board CEO Confidence, ISM Manufacturing New Orders, University of Michigan Consumer Sentiment, and ISM Services. These are leading economic indicators. They tend to lead an economic slowdown. When they dip to this extent a real recession historically follows.

a tale of rolling recessions
Source: Charles Schwab, The Conference Board | Past performance is not indicative of future results.

If we look at all of the Leading Economic Indicators in what is called the Leading Indicators Index, it has plunged over the last 19 months straight. History shows us a 100% probability of a recession based on data going back to 1960.

leading indicators' plunge

Source: Charles Schwab | Past performance is not indicative of future results.

This data indicates that it won’t be different this time.

We have lived with an inverted yield curve since October 2022 — the longest streak ever in U.S. history of the 10-year Treasury Note yield minus the 3-month Treasury Bill yield curve spread. The chart below shows that in each one of these cases, a recession followed. That is 100% accuracy over history. The fact that this inversion is the longest on record indicates it’s not likely that a “soft landing” follows, but a recession.

yield curve says recession

Source: Charles Schwab | Past performance is not indicative of future results.

We hear a lot about the resiliency of the U.S. consumer. The fact is that when consumer savings are drawn down to this extent in the face of rising consumer debt, disposable income is destroyed, and this trend was exacerbated by high inflation. Delinquencies are accelerating. Consumer good companies are warning that 2024 is going to be difficult. These signals have been accurate in forecasting economic slowdowns. Will this one be different?

savings down/consumption up
Source: Charles Schwab, as of 9/30/23

Consumers aren’t the only ones who have spent at an historical pace. The U.S. government has been on a spending spree as a percentage of GDP that has not been seen since WWII. We are beginning to see the employment market weaken and layoffs rise. Whenever we have seen these toxic, twin economic conditions of sharply rising unemployment and government deficits we have ended up with a recession. We believe that is now and it gives us little confidence that the landing will be soft. The only control of deficit spending is Congress, and they show no signs of slowing down. In fact, they are the most dysfunctional government since before the U.S. Civil War. The recessions seem to perfectly match.

unemployment/deficit both up
Source: Charles Schwab, Bureau of Labor Statistics, as of 10/13/23 | Y-axes are truncated for visual purposes. Unemployment rate truncated at 14.7% (4/30/2020); U.S. deficit/surplus as a percentage of nominal GDP truncated at -18.1% (3/31/2021).

We know that Presidential election years tend to be good for equities. We are not saying that a recession will end up badly for equities in 2024. History is all over the place here. However, the trend is clear that the stock market doesn’t always bottom when the Fed stops raising rates. On average, equity markets advance from the final rate hike until the first rate cut by an average of 5%. Now, 5% is the average, but as the following chart shows, markets can be up as much as 20% during that period or down as much as 10%, as they were in the 1980 cycle.

historically the danger for investors is not the Fed pause...
Source: Strategas

The important thing to remember here is that volatility generally rears its ugly head during the recession and stocks do not bottom until an average of 213 days AFTER the first Fed rate CUT. Once again, the average does not necessarily mean that it takes that long for stock prices to bottom. In 1980, stock prices had already bottomed when the Fed finally cut rates. In 1987 and 1994 the bottom of the stock market came in 1–2 months. In the Global Financial Crisis, the bottom didn’t come until a year after the first rate cut. Strategas also points out that the average severity of the bottom is a loss of 23.3% of market value. This number can either be less or much more than the average. The point of this is that the market bottom doesn’t come until after the first rate cut not after the first rate hike. We have not had the first rate cut yet so the cycle is still forming.

...but rather once the Fed starts cutting
Source: Strategas

The timing of recessions, as well as knowing when we are in a recession, is tough to predict. Savita Subramanian, Chief Equity Strategist at Bank of America Securities, reminds us that perhaps the best indicator of the beginning of the recession is the steepening of the yield curve. She points out that when the 10-year minus the 2-year yield curve goes from being inverted to being positive, it is a very valid indication that an economic recession has begun. That curve began to move toward a positive slope in September 2023. It is currently still inverted but still moving toward a flat formation. We shall see if history does indeed rhyme in 2024.

yield curve steepening best indicator recession has begun
Source: Bank of America Global Investment Strategy | Past performance is not indicative of future results.

My final point here is to look at a list of “events” that precede a recession. These are events that typically mark recessionary bear markets going back to 1871. They include:  

  • Yield curve steepening
  • Tightening of credit conditions
  • Fed rate cuts
  • Equity markets decline and bottom
  • Earnings per share trough and then equity markets recover

We have arguably begun this process and as the chart below indicates, we are roughly somewhere between 12 and 15 months away from an equity market trough. If history rhymes here, then 2024 can be a positive, yet bumpy, year for stocks. It might be 2025 that is the bottoming year.

average S&P 500 returns around recessionary bear markets since 1871
Source: BofA Research Investment Committee, Global Financial Data | Past performance is not indicative of future results.

Remember, the “Market Timers Hall of Fame” is an empty room. We are not trying to time the market and we are firm believers that investors should be fully invested at all times. However, what we are saying is that owning the few expensive stocks in a broad index like the S&P 500 is likely to punish concentrated holders in 2024 just as it rewarded them in 2023. We believe a diverse portfolio that is reflective of high-quality companies tends to be resilient in turbulent markets. We want investors to know what to expect and how to think about their portfolios before a slowdown is upon us. After all, survivors are really the only winners in the long-term game of investing.

CRN: 2023-1204-11281 R

This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the Disclosures webpage for additional risk information at commentary-disclosures. For additional commentary or financial resources, please visit


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