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The U.S. Economy Was Fortunate in 2023. 2024 May Tell a Different Story.

Brad Chastain Director of Education U.S. Money Reserve

Written by Brad Chastain

Feb 8, 2024

With the stock market hitting record highs and many economic indicators reporting strong numbers recently, many Americans are left asking why it doesn’t feel like the economy is doing great and why many analysts continue to predict a recession.

While individual circumstances vary—especially considering that 2023 saw multiple bank failures and military conflicts around the world—I think most people can agree that we were fortunate to not have seen as much pain in 2023 as many expected. Most major Wall Street firms predicted a recession in 2023, and even the Federal Reserve meeting minutes show that they expected a recession to begin in the latter half of 2023, with gross domestic product (GDP) growth of only 0.4% for the year.

Instead, in 2023 U.S. GDP grew at a surprising 3.3%, exceeding expectations. The unemployment rate ticked up to 3.7% in December from a 54-year low of 3.4% in January 2023, a much smaller increase than most analysts expected given the Federal Reserve’s aggressive rate-hiking cycle that was designed to curb inflation. Inflation, another area of concern for many Americans, fell from 6.5% in 2022 to 3.4% in 2024, and the stock market responded by reaching new all-time highs.

All combined, this has many pundits claiming that the Fed is likely to achieve the elusive “soft landing,” where it will finish hiking interest rates without leading to a recession. This would be a notable achievement: Since 1961, the Fed has completed 10 rate-hiking cycles, 8 of which were followed by recessions. But if that’s true…

Why do so many people feel that the economy isn’t on the right track if things look good on paper?

Person holding receipts in grocery store aisle

One reason is that price increases from inflation are permanent. Even though prices have stopped rising as quickly as they did when inflation was running hot, overall they have still risen substantially. We are still paying 18.5% more on average for goods and services than in 2020. Two of the biggest expenses for most Americans are food and housing, which have risen by 28% and 24%, respectively. With higher interest rates, many Americans who previously locked in a lower mortgage rate have been stuck, unable to afford the increased cost of moving to a new home, while high interest rates have priced many others out of the housing market entirely.

Another reason the economy may feel like it’s on the wrong track is that many job seekers are having difficulty finding success, even with the low unemployment rate. A recent survey from a leading national staffing company, Insight Global, reports that 55% of surveyed job seekers have been searching so long that they are completely burned out.

Good economic indicators are not indications of what may happen next.

Hand with stylus pointed at stock data

Though we often see economic indicators such as unemployment, inflation rates, and economic growth being used to describe our current economy, these indicators are backward-looking. They are not indicative of what is happening right now or what may happen in the future. In fact, it is often when circumstances are looking their best that we can be lulled into a sense of false security and become unprepared for potential risks.

For example, it’s typical for recessions to be preceded by low unemployment rates. The lowest unemployment rate in history—2.5%—was recorded in June 1953; a recession began the very next month. In the chart below, you can see unemployment repeatedly experiencing downward trends leading up to recessions (the shaded areas).

U.S. Unemployment Rate

The Federal Reserve has stated that it believes it is done with this rate-hiking cycle and may begin lowering interest rates later this year. Historically, this has not boded well for the stock market.

It’s important to remember that a healthy economy can sustain higher interest rates. That’s actually a sign of a healthy economy: If rates stay high, we know that businesses are likely doing well—or at least that the projects they’re borrowing money to fund are providing great enough returns that the businesses can afford higher interest rates on their loans.

If the opposite is true, and businesses can’t afford higher rates on their loans, it means that the economy is weakening—and then the Fed will try to “stimulate” growth by lowering interest rates. With money cheaper to borrow, businesses can more easily afford to invest in growth projects that aren’t as profitable.

The stock market has fallen each of the last 9 times the Fed has cut rates, dropping by an average of 20.5% and bottoming out an average of 276 days following the first rate cut. To be clear, rate cuts don’t cause the stock market to decline. In fact, in isolation lower rates can make stocks worth more, which is why we often see stocks rally when there is speculation of upcoming rate cuts. Stocks can fall when the Fed cuts rates because both events are happening for the same reason: The economy is weak or weakening.

Throughout history, we have repeatedly seen larger portfolio losses happen when they are least expected. From the dot-com bubble to the housing bubble, Global Financial Crisis, and even the Great Depression, consumers had been lulled into a state of comfort by recent market performance, leaving them unaware of the risks ahead. Only by having protection and a diversified portfolio in place before a market correction occurs can you more easily mitigate financial risks.

Gold has enhanced portfolios during both good and bad economic periods.

Gold is an asset that has consistently helped to protect a portfolio during market turmoil. Most people are aware of this fact. What many people, including many financial advisors, fail to recognize is that gold has also enhanced portfolios during good economic times. Since 2000, we’ve seen some of the strongest economic growth and longest bull markets for stocks in history, yet gold has outperformed stocks with a compounded annual growth of 8.05% compared to 7.14% for the stock market.

Diversifying a portfolio by holding a portion in gold has historically provided an opportunity for asymmetric returns by protecting against downside stock market risk during economic turmoil while also providing strong upside possibilities, including during times of economic strength.

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