A soft landing now seems to be the prevailing wisdom both on Wall Street and Main Street. To ascertain the collective opinion or “wisdom of the crowd,” there is a wonderful tool available online called “polymarket.”  Polymarket is a so-called prediction market in which people can wager real money on a vast array of potential future outcomes on subjects ranging from the economy, politics, sports, and entertainment to name a few. There is, literally, a dizzying array of things people can wager on. We at WealthPlan are interested in such things not for their wagering characteristics, but rather for their predictive capacity.  For example, this prediction market is suggesting only a 6% chance of recession in 2024, captured in the chart below.

We agree that the odds of a soft landing are higher than a recession. However, we think the risk of recession in the coming months is probably higher than 6%. This may be a function of the question set-up which asks only about 2024.  If one extends the horizon to 2025, the probability of recession will undoubtedly go up. So, let’s get into the macro-data that may help us more clearly see the things that point to a soft landing, as well as the things that leave the door open for a possible recession.

On the positive or “constructive” side of the ledger are the following: 1. GDP Growth and trend, 2. Fiscal Spending, 3. Interest Rate Cuts, and 4. Money Supply Growth. Here are the charts:

1. GDP Growth
2. Fiscal Spending
3. Interest Rate Cuts
4. Money Supply Growth

On the negative side of the ledger are the following: 1. Employment Growth Deterioration, 2. Consumer Confidence Turned Negative, 3. Fed Balance Sheet Tightening (QT), 4. Yield Curve has now dis-inverted. Here are the charts:

1. Employment Growth
2. Consumer Sentiment
3. Fed Balance Sheet Tightening
4. Yield Curve Dis-inversion

Putting it all together

A soft landing is still in the cards, but we also think a recession is a higher probability than many people presently think. The elements that could be pointing to a recession are all leading in nature. The fact that employment growth is deteriorating while consumer sentiment has turned negative is not a good set-up. Moreover, while the Fed is lowering rates, policies are competing against each other as balance sheet reduction means tightening. Finally, the dis-inversion of the yield curve usually precedes recessions. So, it seems a recession is still in play. If a recession does manifest, we will likely see a highly responsive Fed, and stock markets higher a year out. So, don’t fret. We may see heightened volatility in markets if economic conditions deteriorate. But, the lessons learned from history is that the economy and markets will respond nicely to an accommodative Fed.

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DISCLOSURES

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which Investment(s) may be appropriate for you, consult your financial advisor prior to investing. Information is based on sources believed to be reliable, however, their accuracy or completeness cannot be guaranteed.

1. Polymarket is a decentralized prediction market platform that allows users to place bets on world events. Users buy and sell shares using cryptocurrency to bet on the likelihood of future events taking place. Polymarket uses the Polygon network.
2. Gross domestic product (GDP), the featured measure of U.S. output, is the market value of the goods and services produced by labor and property located in the United States. For more information, see the Guide to the National Income and Product Accounts of the United States (NIPA) and the Bureau of Economic Analysis. U.S. Bureau of Economic Analysis, Gross Domestic Product [GDP], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/GDP, September 22, 2024.
3. Government total expenditures from U.S. Bureau of Economic Analysis, [W068RCQ027SBEA], retrieved from FRED, Federal Reserve Bank of St. Louis September 22, 2024. The federal funds rate is the interest rate at which depository institutions trade federal funds (balances held at Federal Reserve Banks) with each other overnight. When a depository institution has surplus balances in its reserve account, it lends to other banks in need of larger balances. In simpler terms, a bank with excess cash, which is often referred to as liquidity, will lend to another bank that needs to quickly raise liquidity. (1) The rate that the borrowing institution pays to the lending institution is determined between the two banks; the weighted average rate for all of these types of negotiations is called the effective federal funds rate.(2) The effective federal funds rate is essentially determined by the market but is influenced by the Federal Reserve through open market operations to reach the federal funds rate target.(2) The Federal Open Market Committee (FOMC) meets eight times a year to determine the federal funds target rate. As previously stated, this rate influences the effective federal funds rate through open market operations or by buying and selling of government bonds (government debt).(2) More specifically, the Federal Reserve decreases liquidity by selling government bonds, thereby raising the federal funds rate because banks have less liquidity to trade with other banks. Similarly, the Federal Reserve can increase liquidity by buying government bonds, decreasing the federal funds rate because banks have excess liquidity for trade. Whether the Federal Reserve wants to buy or sell bonds depends on the state of the economy. If the FOMC believes the economy is growing too fast and inflation pressures are inconsistent with the dual mandate of the Federal Reserve, the Committee may set a higher federal funds rate target to temper economic activity. In the opposing scenario, the FOMC may set a lower federal funds rate target to spur greater economic activity. Therefore, the FOMC must observe the current state of the economy to determine the best course of monetary policy that will maximize economic growth while adhering to the dual mandate set forth by Congress. In making its monetary policy decisions, the FOMC considers a wealth of economic data, such as: trends in prices and wages, employment, consumer spending and income, business investments, and foreign exchange markets.
4. The federal funds rate is the central interest rate in the U.S. financial market. It influences other interest rates such as the prime rate, which is the rate banks charge their customers with higher credit ratings. Additionally, the federal funds rate indirectly influences longer- term interest rates such as mortgages, loans, and savings, all of which are very important to consumer wealth and confidence.(2) Board of Governors of the Federal Reserve System (US), Federal Funds Effective Rate [FEDFUNDS], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/FEDFUNDS, September 22, 2024.
5. Before May 2020, M2 consists of M1 plus (1) savings deposits (including money market deposit accounts); (2) small-denomination time deposits (time deposits in amounts of less than $100,000) less individual retirement account (IRA) and Keogh balances at depository institutions; and (3) balances in retail money market funds (MMFs) less IRA and Keogh balances at MMFs. Beginning May 2020, M2 consists of M1 plus (1) small-denomination time deposits (time deposits in amounts of less than $100,000) less IRA and Keogh balances at depository institutions; and (2) balances in retail MMFs less IRA and Keogh balances at MMFs. Seasonally adjusted M2 is constructed by summing savings deposits (before May 2020), small-denomination time deposits, and retail MMFs, each seasonally adjusted separately, and adding this result to seasonally adjusted M1. Board of Governors of the Federal Reserve System (US), M2 [M2SL], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/M2SL, September 22, 2024.
6. The civilian noninstitutional population is defined as: persons 16 years of age and older residing in the 50 states and the District of Columbia, who are not inmates of institutions (e.g., penal and mental facilities, homes for the aged), and who are not on active duty in the Armed Forces. The series comes from the ‘Current Population Survey (Household Survey)’ U.S. Bureau of Labor Statistics, Employment Level [CE16OV], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/CE16OV, September 22, 2024.
7. At the request of the source, the data is delayed by 1 month. To obtain historical data prior to January 1978, please see FRED data series UMCSENT1. This data should be cited as follows: “Surveys of Consumers, University of Michigan, University of Michigan: Consumer Sentiment © [UMCSENT], retrieved from FRED, Federal Reserve Bank of St. Louis, (Accessed on date)” Copyright, 2016, Surveys of Consumers, University of Michigan. Reprinted with permission. University of Michigan, University of Michigan: Consumer Sentiment [UMCSENT], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/UMCSENT, September 22, 2024.
8. Board of Governors of the Federal Reserve System (US), Assets: Total Assets: Total Assets: Wednesday Level [RESPPANWW], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/RESPPANWW, September 22, 2024.
9. Starting with the update on June 21, 2019, the Treasury bond data used in calculating interest rate spreads is obtained directly from the U.S. Treasury Department. Series is calculated as the spread between 10-Year Treasury Constant Maturity (BC_10YEAR) and 2-Year Treasury Constant Maturity (BC_2YEAR). Both underlying series are published at the U.S. Treasury Department. Federal Reserve Bank of St. Louis, 10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity [T10Y2Y], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/T10Y2Y, September 22, 2024.

No investment strategy can assure success or completely protect against loss, given the volatility of all securities markets. Statements of forecast and trends are for informational purposes and are not guaranteed to occur in the future. All performance referenced is historical and is no guarantee of future results. Securities investing involves risk, including loss of principal. An investor cannot invest directly in an index.