In the realm of economics, recessions are often viewed with dread, but a deeper understanding reveals them as a normal and necessary reset within the broader economic cycle. As history shows, periods of expansion are typically longer than those of contraction, setting a stage for regular but temporary downturns. This article aims to demystify the economic cycle’s impact on markets and investor sentiment, guiding individual investors through potential future scenarios based on current economic indicators.
Understanding Economic Cycles for 2024 US Recession
Economic cycles comprise phases of growth and contraction. While the fear of recession can dominate headlines and investor sentiment, it’s crucial to recognize these periods as part of the economic fabric. For instance, in July 2022, recession fears peaked, coinciding paradoxically with the beginning of a recovery in both the stock market and the broader economy. Such instances underscore the challenge of predicting economic turns and the importance of looking at a wide array of other economic and market indicators.
Shifting Investor Sentiments for 2024 US Recession
Currently, investor sentiment has shown a significant shift. As of late, about 45% of investors expect a gentle deceleration of economic growth—a soft landing—by the end of 2024, while only 17.7% are bracing for a hard landing that could tip the economy into a recession. This shift represents a more optimistic outlook compared to the dire predictions of 2022.
The Role of Manufacturing and PMI
The Purchasing Managers’ Index (PMI) is a vital indicator of economic health, particularly in manufacturing. A high PMI indicates economic robustness, whereas a low PMI points to contraction. As of recent readings, the PMI suggests that the US is on a path to recovery, not contraction, which many investors initially feared in 2022 when the PMI hovered near recessionary levels.
The Predictive Power of Treasury Yields
The 10-year Treasury yield, especially when analyzed through specific models such as the inverted yield shifted forward by 14 months, has historically provided foresight into economic trends. This method has predicted major economic shifts and recoveries, including those following the downturns of 2000, 2008, 2019, and 2022. The academic perspective supports this, noting that the impact of interest rates on the economy typically unfolds over approximately 14 months.
Current Interest Rate Implications for 2024 US Recession
Despite a current period that feels economically stable, interest rate trends suggest potential challenges ahead. With rates indicating a possible downturn starting in September 2024, investors might experience a shift in the economic climate, which could reverse the gains seen in the recent market rally. But until then, the market seems to be in a Goldilocks period, where more upside seems very likely.
NAAIM Exposure Index and S&P 500 Index Technical Structure
The NAAIM Exposure Index highlights that fund managers have now deleveraged their long positions on the S&P 500 significantly over the last couple of months. In March 2024, fund managers were leveraged long on the market.
Every time that these fund managers go leveraged long, it makes the S&P 500 vulnerable to a pullback. That’s was the outcome this time around as well. But with their recent deleveraging and fear in the market, we’ve recently added more names to our Watchlist at Game of Trades.
The S&P 500 continues to maintain a bullish structure, supported by upward trends in key moving averages like the 50, 100, 150, and 200-day lines, signaling continued market strength in a bull market scenario.
Conclusion
The understanding of economic cycles, investor sentiment, and market indicators like the PMI and Treasury yields provides a framework for anticipating future economic and market trends. While current indicators suggest an economic decline by September 2024, the period until then can still see more upside on the S&P 500 index. The bullish technical structures are still intact with the 50, 100, 150, and 200-day moving averages all sloping upward, which is atypical of bull markets. Click here to get a 7-day free trial! Subscribe to our YouTube channel and Follow us on Twitter for more updates!
