The US economy and equity markets performed far better in 2023 than had been expected by the consensus, which had projected a recession. The starting conditions in the United States, although not in several other economies, were robust, including a strong household sector and record-level corporate profits.
As 2024 approaches, recession is still not the most likely scenario, although the chances of such have increased, according to Abby Joseph Cohen, professor of business in the Economics Division at Columbia Business School.
Cohen, also a retired partner and US chief investment strategist at Goldman Sachs, shared key insights on the current global market trends in an event hosted in November by CBS’s Jerome A. Chazen Institute for Global Business and Dean Emeritus Glenn Hubbard.
The following are some of the key insights from Cohen on the global economy in the coming year.
On the economic outlook: Cohen noted that, contrary to the consensus 18 months ago, she was skeptical that the US economy was headed toward recession in 2023. Now, while the consensus forecast has flipped away from recession in 2024, she thinks the odds have increased. Household debt has increased, weakening the consumer balance sheet. In addition, job growth and capital spending have slowed. Interest rates have gone up, raising costs for borrowers, including households, corporations, and government.
Cohen also stressed that China, the world’s second largest economy, is facing severe internal problems linked to credit, while several nations in Europe are experiencing weak economic activity. Overall, global economic growth appears to be decelerating.
On identifying opportunities in specific asset markets: Some portions of the financial markets may be overpriced, especially relative to other opportunities, according to Cohen. For example, portfolios have had an overconcentration of “Magnificent Seven” technology stocks (Amazon, Apple, Alphabet, Microsoft, Meta, NVIDIA, and Tesla). However, share prices in other equity sectors, such as financial services and industrials, do not seem to reflect their strong underlying performance as companies. The rise in interest rates may be largely complete, to the benefit of bond and equity prices.
On the impact of US domestic policy and geopolitics: Legislators avoided a US government shutdown in November thanks to the bipartisan passage of a temporary funding bill. However, Cohen cautioned that Congress will likely repeat the drama in January and February. Importantly, Congress has yet to approve the critical defense-related spending for Ukraine, Egypt, and Israel, which is opposed by some House Republicans. Failure to fund the US government could be a source of notable destabilization that equity, fixed income, and currency markets have not yet priced in.
On future budget issues: Cohen noted that the two-step funding process put in place by House Speaker Mike Johnson for early 2024 has not yet been tested. In the longer term, the rising debt of the US government hasn’t been addressed by administrations of either party. Along with other factors, the aging of the population combined with higher interest rates means the annual burden has risen.