Wall Street analysts are once again warning of a possible recession and stock market losses as elevated inflation and interest rates finally take their toll on the economy and consumers’ wallets.

“Don’t bet on it,” says renowned economist Allen Sinai, PhD. He sees the economic expansion and bull market staying intact for 2024 and perhaps even 2025, thanks to continued low unemployment and government spending this year on everything from military aid to domestic manufacturing to highways and infrastructure. At the same time, Dr. Sinai warns that stock investors should expect lots of volatility because of a contentious US presidential election and geopolitical uncertainties around the globe.

Wartime Economy?

We are in the third year of an economic expansion that many people doubted could last this long—certainly not after the Federal Reserve hiked interest rates at the fastest pace in 40 years. Fears that rapid tightening would stall the economy have not materialized. In fact, the economy grew at a robust 5.2% annual pace in the third quarter of 2023 even as inflation came down from 9% in the summer of 2022 to 3.2% in December 2023. I think the “soft landing” so far gives us another 18 months of expansion, but I expect economic growth to slow as businesses and households feel the effects of high interest rates.

One overlooked reason the US economy will continue to be resilient in 2024: The Federal government is engaged in wartime spending. As of press time, the Biden Administration had proposed a national security package that includes $105 billion of military and humanitarian assistance for the Ukraine, Israel, Gaza and Taiwan, as well as the US–Mexican border. Historically, in times of international strife, Congress is supportive. So far, Congress has already passed the CHIPS and ­Science Act—this provides $52.7 billion to the US semiconductor industry to ­create domestic jobs and reduce the chance that the chip supply will be interrupted. It’s hard to fall into a big recession when there’s this much federal money flowing through the economy.

Three Big Risks

That said, there are a few major wild cards investors must watch for that could undermine this upbeat forecast…

Inflation reaccelerates. The inflationary episode of the 2020s is not over yet. Once inflation becomes endemic, it is hard to stamp out. It can die down for months, even years, then flare up. If economic growth is hotter than expected and inflation picks up, the Fed has indicated its willingness to push short-term interest rates even higher. This could set off a financial crunch and the disarray that precedes almost every recession.

More bank failures and a credit crunch. Last year’s collapse of First Republic Bank, Silicon Valley Bank and Signature Bank were the second-, third- and fourth-largest bank insolvencies in US history. The danger of more failures remains, especially if high mortgage rates and long-term interest rates lead to commercial and residential foreclosures.

Geopolitical risks. The world is a different place now than in many years pre-pandemic, and the peace dividend is gone. If the US is militarily drawn into hot spots in the Middle East and Eastern Europe…or the economic Cold War between the US and China escalates…we could see higher energy and commodity prices, surging inflation, sagging consumer confidence and reduced consumption.

Weaker Bull Market

Investors shouldn’t expect stock market returns in 2024 and 2025 to be nearly as good as in 2023. While I think short-term interest rates have probably peaked, they still are high enough to dampen stock performance. I don’t expect a cut this year in the federal funds rate because inflation still is much higher than the Central Bank’s 2% target goal—2% is considered low enough for consumer comfort but relaxed enough for the economy to flourish. It will be difficult to reach that target because inflationary pressures abound. Examples: Outsourced manufacturing and cheap imports from China are fading, and aging US demographics have led to an intense shortage of labor, allowing workers to demand higher compensation.

Key US Economic Indicators

Gross Domestic Product (GDP) likely will grow 2%+ in 2024 after an estimated 2.6% advance last year. Gains still will be driven by steady consumer spending that likely will rise about 3% in 2024…and from strong state and federal government spending and hiring, which now accounts for 17% of overall GDP.

Inflation: As measured by the Labor Department’s Consumer Price Index (CPI)—a basket of consumer goods and services including energy and food costs—inflation will end 2024 at 3%.

Unemployment should rise slowly as the economy cools. The 3.7% jobless rate in 2023 will increase to 4.3% by year-end 2024. Average hourly earnings for private-sector workers will continue to accelerate, rising from 4.2% in 2023 to 4.5% in 2024 and continue to support consumer spending.

Housing. Rates on 30-year fixed-rate mortgages were near 8% in late 2023 and could end up rising some more. The “lock-in effect”—homeowners’ reluctance to sell existing properties and buy ones with higher mortgage rates—will keep home prices high.

Outlook for Stocks

Including dividends, the Dow Jones Industrial Average likely should gain 9% in 2024…and the S&P 500, 11%. From a historical perspective, stock valuations are slightly higher than normal but still look attractive, thanks to improving company profits. I expect corporate earnings to grow between 7% and 10% this year. Reasons: Companies are good at improving profit margins and are using AI to enhance the customer experience, make supply chains efficient and increase sales.

Best areas of the market for 2024…

Information technology. This still is my favorite sector despite heightened valuations among “the Magnificent Seven” (Amazon, Alphabet, Apple, Meta Platforms, Microsoft, Nvidia and Tesla). These companies are immensely profitable…maintain cash hoards that make them havens in risky times…and can offer steady earnings because they have become essential to how we live each day.

Consumer discretionary. This area will do well, especially in categories where consumer spending is healthiest, including travel, leisure and entertainment.

Areas of the market to avoid…

Banks and financial services. A prolonged period of tight monetary policy and high interest rates creates excessive risk for these companies, including the possibility of rising commercial loan defaults and massive losses if they are forced to liquidate holdings in their portfolios.

Outlook for Bonds

The ugly bear market in fixed income will continue for a fourth year but much less so…and negative returns are possible. Huge federal government deficit spending will keep bond yields high, pushing down prices. The yield on 10-year US Treasury bills likely will rise above 5% by year-end 2024. If you are a conservative bond investor, there is little to be gained taking credit or maturity risk. Stick with cash in money-market mutual funds or one-year Treasury bills, both recently yielding over 5%.

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