Investors are generally happy that the worst fears of runaway inflation versus a severe recession were not realized in 2023. Nevertheless, there are still economic and investment risks for 2024 to be considered. The US economy has been more resilient that many expected through 2023 which has kept investors positive about the stock market. Looking ahead there are three distinct risks to consider. Consumers are not obliged to keep spending at the current rate. Financial system liquidity is not guaranteed going into next year. And the current uprising in the House of Representatives could lead to a substantial reduction in federal government spending.
How Long Can Consumers Keep Spending?
The Covid pandemic created a unique situation. People spent months cooped up at home. Spending patterns were distorted. Many folks saved their money and only started to spend once the shutdowns ended. Some of this catching up on spending is still going on. But it is certain to end. This is the first of the economic growth trends that is at risk of unwinding in 2024. There is about a third a trillion dollars in American household savings that is steadily being spent and due to run dry somewhere in 2024. Combine this with rising credit card debt and we have the prospect of an economic slowdown next year.
How Liquid Is the US Financial System?
As the US borrows more and more to finance its debts that draws capital away from other investments. A foreign issue that has some of the same effect is the Bank of Japan raising interest rates. This will divert some of the money that normally would have been invested in the US toward investments in Japan. The end result will be less money available for borrowing in the US and higher rates. This could have the effect of slowing the US economy and dragging down the stock market.
Less Governmental Spending Could Slow the Economy
Government spending associated with Biden’s economic agenda has pumped money into the economy. This includes the CHIPS act and infrastructure spending. Meanwhile, US government debt has been downgraded due to the actions and inactions of the traveling circus in Washington known as the House of Representatives. The amount of US governmental spending is a valid issue as is the unwillingness to tax at a sufficient level to pay for governmental programs. The combination of more trouble with government shutdowns and reduction of any number of spending programs has the potential to drag down the economy just as consumers are backing off and there is less liquidity available.
Investment Outlook for 2024 and Thereafter
The US learned a lesson from how it dealt with the 1929 market crash and following financial crisis. The Smoot Hawley act that picked a trade war with Europe devasted economies on both sides of the Atlantic and was a major cause of the Great Depression. The urge to “punish” those who had borrowed and were in financial dire straits at the start of the 1930s likewise lead to the worse economic situation of the century. It was good fortune that the head of the US Federal Reserve during the Great Recession had studied the Great Depression and knew that the cure was to support credit and keep businesses afloat. Ben Bernanke along with Henry Paulson at the US Treasury were instrumental in keeping the Great Recession from being a repeat of the Great Depression. Sadly, that lesson is being ignored by many with the ability to either drive or thwart US economic policy.
The amount of US debt and continually spending more than we collect in taxes is a real problem. However, a genuine threat to the economy and investments is the unwillingness in Congress to balance the budget with a judicial mix of taxes and budget cuts. This, in our view, is the main threat to investment in 2024 and going forward.