US Stock Markets Might Dip in 2024: Here’s Why

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Key Takeaways

  • Higher interest rates and rising inflationary pressures could delay the Fed's rate cuts, impacting business activity and stock valuations.
  • US national debt at $34 trillion and increasing consumer credit card delinquencies signal economic vulnerability and potential downward pressure on the economy.
  • Slowing labor market, declining consumer sentiment, and recession indicators suggest potential economic challenges ahead.

Rising national debt, consumer credit issues, and a slowing labor market might be signs of possible recession for the US economy. What do analysts think of the perspectives?

Nasdaq recently touched new highs as various cruise companies, tech firms (like Nvidia) and retailers posted positive earnings.

However, many indicators suggest taking this rally with a pinch of salt. Here are five headwinds that US stock markets face in 2024:

1. Higher for Longer Interest Rates

The recent economic data, while being positive, has raised concerns that the Fed might not start unwinding the monetary policy tightening this year, or at least not as fast as many investors expected.

Business activity in the US hit two years high and data shows price pressures are building up. S&P Global’s Composite PMI Output Index touched 54.4 – its highest level since April 2022. This means inflationary pressures are building in the manufacturing sector, and that can delay the Fed’s plans to cut rates, as shown by the CME FedWatch Tool.

Source: CME Group
Source: CME Group

Higher interest rates negatively curtail business activity, impacting the business environment. This can have a crucial impact on a company’s bottom line, which will be highlighted in stock market valuations.

2. National Debt of US stands at $34 trillion

US national debt at $34 trillion has worried most analysts and economists. While indicators show that the economy is growing, many have termed it as debt-fueled growth. Consumers have started to tap into their savings, which stand at their lowest level since 2022 at 3.2%.

Credit card delinquencies, another measure to gauge consumer economic health, are flashing red as one-fifth of credit card holders used 90% of their limits in Q1 of 2024. With the national credit card balance at $1.12 trillion, around 6.9% of users fell into delinquency in Q1 2024, up from 4.6% in 2023. At 3.1%, the overall delinquency rate stands at its highest since 2011.

US consumer credit card debt | Source: Reuters
US consumer credit card debt | Source: Reuters

If rates stay higher for longer and there is any external shock to the economy (e.g., higher oil prices due to geopolitical escalations), then the US economy and stocks will face downward pressure.

3. Slowing Labor market

Andrew Hollenhorst, Citi Group’s chief economist, recently warned that firms are hiring at a slower pace. This can be observed most in small businesses, where hiring intentions are at 2016 levels. Furthermore, the unemployment rate has increased from 3.5% to 3.9%, which is a significant jump. Moreover, data from the state level shows a sharp rise in unemployment from 2023 to 2024.

While the situation seems stable for now, if the downward trend continues, this can also dampen the economic sentiment.

4. Shifting Consumer Sentiment

Consumer sentiment and narrative play an extremely important role in determining the direction of the market. In fact, there is a theory that explains this impact: Narrative Economics.

Source: CNN – Fear and Greed
Source: CNN – Fear and Greed

According to the Michigan Index of Consumer Sentiment, consumer sentiment plunged 10.5% in May, hitting its lowest level in the past five months. Meanwhile, most consumers are concerned about stability. The survey highlights that inflation expectations, which are closely followed by the Fed, are also inching up, as the majority of consumers expect prices to move higher by 3.3%.

Source: Survey of Consumers, University of Michigan
Source: Survey of Consumers, University of Michigan

5. Recession risks

While the call for a recession has lost its appeal, it is still premature to think that there will be no recession at all. Many indicators point toward underlying issues. For instance, the Leading Economic Index is still heading downward.

Historically, the six-month change of the LEI has been a useful recession predictor. The LEI slipped 0.6% in April 2024 and 0.3% in March 2024.

Source: Investing.com
Source: Investing.com

Another important indicator, the inverted yield curve, has successfully predicted a recession as far back as the 1950s with only one false positive in 1966. The 10-year bond and 3-month bill have been inverted. The yield curve inverted back in July 2022, making it the longest inversion ever.

Source: Noah Pinion
Source: Noah Pinion

Another measure that is indicative of economic activity (the percentage of banks that are tightening their lending standards) is flashing a warning sign.

Almost 78% of consumers are living paycheck to paycheck. The latest data by the Fed highlights that 42% of consumers cannot afford a $1000 surprise expense. Almost 28% of adults said they struggled financially last year, the highest figure in the last seven years.

Therefore, savvy investors and analysts will not ignore the possibility of a prolonged higher interest rate regime, a possible slowdown in the labor market, highly fickle consumer and investment sentiment, and debt-fueled growth. Recessionary indicators are still hinting at a slowdown.