ZROZ - 2024 Global Market Outlook - Q2 Update: Pent-Up Exuberance

2024-03-26 14:15:00 ET

Summary

• We think it's more likely than not that the U.S. avoids a recession in 2024, but economic uncertainty remains high with the economy running at full capacity, household savings diminishing, the labor market slowing down, and the U.S. Treasury yield curve still inverted.
• The U.S. Federal Reserve, the European Central Bank and the Bank of Canada could begin cutting rates by June. We think the Bank of England and the Reserve Bank of Australia may follow suit in the third quarter of the year.
• Amid an uncertain economic outlook, we're emphasizing the importance of security selection and diversification as the second quarter unfolds.

Pent-up exuberance

Raphael Bostic, President of the Federal Reserve Bank of Atlanta, coined the phrase "pent-up exuberance ¹ " in a recent speech. He was referring to the risk of renewed economic acceleration in the U.S., but it also captures the mood of investors. Economic growth is proving resilient, inflation is falling, and corporate profits are holding up, particularly for artificial intelligence-themed mega-cap stocks . Those investors who were fearful of recession in 2023 are being drawn into the market and positive momentum has the potential to push the S&P 500® Index to further record highs. Exuberance about the surprising robustness of the U.S. economy is spilling over to investor enthusiasm.

Is the U.S. labor market slowing down?

Scratch below the surface, however, and cracks are becoming visible. The U.S. labor market is cooling, with job openings down about 25% as of mid-March from their early 2022 peak, and there are signs that lower-income households are coming under stress. Default rates on credit cards and auto loans are above pre-pandemic levels. In the corporate sector, high-yield default rates are picking up and commercial real estate delinquencies continue to rise.

Corporates and households built strong defenses against U.S. Federal Reserve (Fed) tightening following the pandemic, accumulating large cash reserves and locking in low interest rates on 30-year mortgages and longer-term corporate bonds. These defenses, however, are now weakening. It is possible the Fed can calibrate monetary policy perfectly, so inflation settles near 2% and job growth cools from the average of 265,000 over the past three months to the near 100,000 per month needed to keep the unemployment rate from falling further....

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