Is a U.S. recession still possible in 2024?

by Erik Ristuben, Chief Investment Strategist, Russell Investments

Executive summary:

• We expect the impacts of aggressive monetary tightening to take longer than usual
• We believe there's a 55% probability of a U.S. recession in the next 12-18 months
• Overreaction to a market or geopolitical event can be very costly for investors

On a special edition of Market Week in Review, Chief Investment Strategist Erik Ristuben and Sophie Antal-Gilbert, Head of AIS Portfolio & Business Consulting, discussed the global market outlook for 2024, including the potential for a U.S. recession. Ristuben, who is retiring at the end of the month, also shared some parting words of wisdom gleaned from his 38-year career at Russell Investments.

2024 Global Market Outlook: Next stop, the Twilight Zone?

Antal-Gilbert kicked off the conversation by noting that the strategist team at Russell Investments recently released its 2024 Global Market Outlook, dubbed The Twilight Zone. Ristuben said that the title is fitting because it conveys the strange place the global economy is in—caught somewhere between an economic slowdown, a possible recession and a recovery.

“The key question for investors heading into 2024 is whether the extraordinarily quick tightening campaigns we’ve seen from key central banks will have different economic impacts than usual. Normally, when central banks raise interest rates as dramatically as they have over the past 20 months or so, a substantial economic slowdown occurs, triggering a recession. So far, however, this hasn’t been the case in developed markets,” Ristuben said, noting that in the U.S., the economy remains largely robust despite a cumulative 525 basis points (bps) of rate increases since March 2022.

However, he believes that the typical impacts of aggressive Fed tightening will still likely work their way through the economy—just at a slower pace than usual. In other words, the current business cycle is likely to be a case of this time is longer rather than this time is different, Ristuben noted.

“A lot of the uniqueness of the current situation can be chalked up to the fiscal stimulus provided by governments around the world during the COVID-19 pandemic,” he said, explaining that because of this, real incomes actually rose during the pandemic-induced recession. In addition, low interest rates during COVID-19 lowered the debt-service burdens for individuals and corporations, making it more manageable to control and pay back debt.

With interest rates significantly higher today, borrowing money is more expensive, which will impact both businesses and individuals alike, Ristuben said. “Remember that it generally takes about 18 months for a change in monetary policy to work its way through the system. With most of the Fed’s rate hikes occurring less than 18 months ago, there’s still another 450 bps or so of tightening that has yet to be digested by the economy and markets,” he concluded.

What type of recession could the U.S. experience next year?

The conversation shifted to recession probabilities, with Ristuben stating he believes there’s a 55% chance of a U.S. recession in the next 12 to 18 months. In his opinion, if a recession does strike, it’s likely to be mild or moderate in magnitude, due in large part to the manageable debt-service burdens of corporations and households.

“It’s important to remember that in most developed markets, consumer spending comprises about 70% of the economy. And because consumers aren’t in a tremendous amount of debt, they should be able to weather an economic downturn better this time around. In addition, corporate balance sheets generally look resilient as well,” Ristuben remarked. Amid this backdrop, the next U.S. recession is unlikely to be severe in scope, he said.

Overreacting is costly: Erik’s parting message to investors

In front of a packed studio audience celebrating Ristuben’s 38-year career at Russell Investments, Antal-Gilbert asked Ristuben for any final nuggets of wisdom before his retirement at the end of the year.

“One key observation I’ve seen time and time again over the past four decades is that overreacting is very costly for investors. Whether it’s a positive or negative overreaction to a market event, a geopolitical event, you name it—when investors overreact by getting rid of risk or adding risk, it usually doesn’t turn out well,” Ristuben stated. He explained that in his opinion, a good financial advisor will often have to tell clients to do what they don’t want to do—and prevent them from doing what they want to do. This is especially important in times of high uncertainty like today, Ristuben noted.

Ristuben also said that 2023 is not the first time he’s heard that the old rules that govern markets don’t apply anymore. “This year, in fact, is the third time in my career when I’ve been told that the standard 60/40 equity/fixed income portfolio is dead. But I don’t think that’s the case. The relationship between equities and bonds isn’t broken, and I expect that the 60/40 portfolio will come roaring back soon, just like it did the other two times in my career when it was written off,” Ristuben concluded.

With that, Antal-Gilbert thanked Ristuben for his decades of service to the company, and Ristuben—the driving force behind much of our thought leadership, including the launch of Market Week in Review 10 years ago—signed off the airwaves for the final time.

Editor’s note: Erik Ristuben touched the lives of countless clients and colleagues alike during his 38 years at Russell Investments. We wish him all the best in his retirement.

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