Kevin Simpson Sees Soft Landing, Slowing Growth in 2024
Much depends on how quickly and at what pace the Fed will start cutting rates.
2023 has been a bit of a surprise.
With surging inflation and rising interest rates, many expected that 2023 would be a tough year with the markets marred by volatility and an economic recession. However, the year’s outcome has been much better than expected.
Despite the Fed’s restrictive monetary policy, there has been no recession, the labor market remains robust, and the consumer has proven amazingly resilient—all while inflation has fallen significantly and equity markets are achieving double-digit returns.
2024: Prospects for Growth
Moving into 2024, it’s safe to say that we should expect growth to moderate somewhat next year. Much depends on the Fed’s actions and its monetary policy. More specifically, how quickly and at what pace will they start cutting rates? A longer restrictive policy will put downward pressure on economic growth prospects.
It’s important to note that the resilience of the consumer and the strength of the labor market can continue to provide support for the economy. So, while I expect growth to slow down, there doesn’t have to be a meaningful contraction. A slowdown in growth is still growth.
The soft-landing scenario of inflation falling faster than growth continues to be a good possibility. Much of the inflation spike was a result of supply chain issues, and those bottlenecks continue to resolve themselves. That fact along with a modest slowdown in growth will motivate companies to cut prices to maintain their market share, which should further help inflation drift lower.
Rising Rates: The Saga
As far as rates are concerned, we don’t necessarily need to see rate cuts at the beginning of next year for stocks to rally. Instead, we just need the Fed to maintain a calming voice—and this week they did even more to fuel that market.
I believe that the Fed can conceivably sit back and let slower, but stable, economic growth and declining inflation put downward pressure on yields. In other words, it can let the bond market do the work in the early part of 2024. Lower yields will support growth while, at the same time, allowing for a slightly higher multiple, both of which would be favorable for stock prices.
In the second half of the year, we will be pricing in 2025 earnings. By then, the talk about the Fed cutting rates will be a real concrete thing – which they’ve all but teased up with the recent dot-plot.
Robust Corporate Earnings May Continue in 2024
Reading various 2024 notes and S&P price targets seem to imply bullish sentiment on the Street.
Whether you’re expecting a modest gain for next year or another strong performance, it’s easy to understand the justified optimism. Despite evidence of slowing growth, corporate earnings have remained robust. That trend should continue next year as inflation continues to decelerate.
Remember, the names in your portfolio can change, but the methodology of finding great investments never does. We believe that sticking to a rules-based approach is key. Not just for the coming year but for all of those ahead.
Kevin Simpson is a regular contributor on CNBC and the CIO/Founder of Capital Wealth Planning, a $9B asset manager based in Naples, FL. His Twitter handle is @coveredcalls and his LinkedIn is under Kevin Simpson.
