Recession 2024: What to Watch and How to Prepare
Wayne Duggan

Recession chances remain elevated heading into 2024.

Any investor who hasn't been living under a rock for the past year is already aware that the primary economic risk factor heading into 2024 is inflation.

The U.S. economy is on relatively solid footing heading into 2024 compared to a year ago. Inflation has cooled, labor markets have remained stable and the Federal Reserve has opened up to the possibility of decreasing interest rates at some point next year. 

Many economists, including Federal Open Market Committee, or FOMC, members, anticipate a soft landing for the U.S. economy in 2024 that will include slowing GDP growth without a recession. However, a single misstep in Fed policy could easily slow the economy so much that it contracts into a recession, making the next several months a critical period for the central bank.

Economic recessions are no reason for panic and have been a regular occurrence over the past century. However, investors can make the most of a difficult situation by knowing which risk factors to watch and how to position their portfolios if a recession happens in 2024.

2024 Recession Risk Factors

Many factors can trigger or contribute to a recession, but there's no question over which two are the biggest risks to economic stability in 2024.

Any investor who hasn't been living under a rock for the past year is already aware that the primary economic risk factor heading into 2024 is inflation. After reaching a 40-year high of 9.1% in June 2022, year-over-year consumer price index inflation has fallen to just 3.1% as of November 2023.

The second risk factor in 2024 is elevated interest rates. The Federal Reserve has taken an aggressive approach to combating inflation by raising interest rates to 22-year highs, and it has made tremendous progress in getting inflation trending steadily lower toward its long-term goal of 2%. Higher interest rates increase the cost of borrowing money, discouraging companies from taking on debt to invest in expanding their businesses. Higher rates also reduce consumer spending, easing demand pressures that contribute to rising prices.

The Federal Reserve has raised interest rates 11 times since March 2022, bringing its fed funds target rate range up to between 5.25% and 5.5%. The Fed issued its most recent rate hike in July 2023. Given the latest inflation trends, the bond market predicts that the Fed will pivot from rate hikes to rate cuts by March 2024, potentially stimulating the economy.

But while the Federal Reserve can celebrate the progress it has made in 2023, the latest core personal consumption expenditures (PCE) price index reading in late November suggests it's too early for the Fed to declare victory just yet. Core PCE, which excludes volatile food and energy prices and is the Fed's preferred inflation measure, was up 3.5% year over year in October, well above the FOMC's 2% target.

To make matters worse, the last leg of the inflation battle may be the most difficult period for the Fed, thanks to so-called sticky inflation. Sticky inflation is when pricing for certain goods and services doesn't respond easily to monetary policy adjustments, as it hasn't for children's clothing, auto insurance and medical products. Even as inflation in other areas of the economy continues to fall, sticky inflation may keep the Fed from reaching its 2% target for far longer than investors anticipate and force the central bank to delay its pivot to rate cuts.

Will There Be a Recession in 2024?

Inflation and rising rates have not yet dragged down the U.S. economy. The U.S. added 199,000 jobs in November, and the unemployment rate remains historically low at just 3.7%, according to the U.S. Bureau of Labor Statistics. 

Investors should continue to monitor the labor market in coming months as tight monetary policy often has a lagging impact on economic growth. U.S. GDP grew 5.2% in the third quarter of 2023, but the latest Federal Reserve economic projections suggest that growth will slow to just 1.4% for the full year in 2024.

The 10-year and two-year U.S. Treasury yield curve has been inverted since mid-2022, a historically strong recession indicator. U.S. credit card debt recently hit a record high of more than $1 trillion. Delinquencies on mortgages, auto loans and credit cards are all trending higher – potential red flags that U.S. consumer strength is deteriorating.

The S&P 500 has rallied into the end of 2023 as investors cheer falling inflation rates and anticipate aggressive Fed rate cuts in 2024. But as of Dec. 4, the New York Fed's recession probability model suggests there is still a 51.8% chance of a U.S. recession sometime in the next 12 months.

Bill Adams, chief economist for Comerica Bank, says a combination of strong U.S. consumer spending trends, falling long-term interest rates, and declining gasoline prices suggest the chances of a U.S. recession are trending lower.

"Consumers are sustaining the U.S. economic expansion," Adams says.

"Risk of a recession near term is receding, with prices of gas and home heating down sharply, employment rising and mortgage rates falling."

Chris Zaccarelli, chief investment officer for Independent Advisor Alliance, says there are still real risks to the U.S. economy in 2024, but being too cautious about economic risks in 2023 was a huge mistake for investors.

"Bears will continue to keep pushing their forecast forward – first by months and next by years – and say that everything they believed in October of 2022 is still true today," Zaccarelli says.

"And many of those concerns (e.g., higher interest rates, inflation above target and de-globalization trends) are all still valid, and yet what was missing from their thesis – a resilient labor market and an even more resilient consumer – are the reasons that they were wrong all year."

What to Invest In During a Recession

There are several general strategies investors can take to manage risk and take advantage of opportunities should the U.S. slip into a recession in 2024.

First, consider reducing exposure to volatile stocks and increasing cash holdings. Cash may not be the most exciting play, but it reduces market risk and provides financial flexibility if a recession creates potential buying opportunities in 2024. You can earn up to 5.75% interest on a one-year certificate of deposit right now, potentially locking in that yield even if the Fed begins cutting rates. 

Certain stocks and market sectors are more defensive than others and tend to outperform the rest of the market during recessions. Utility stocks, health care stocks and consumer staples stocks are considered defensive investments because their earnings tend to be insulated from economic cycles and swings in consumer confidence.

In addition, certain individual stocks have outperformed during each of the past two U.S. recessions. Walmart Inc. (ticker: WMT), Abbott Laboratories (ABT) and Synopsys Inc. (SNPS) are just three examples of stocks that beat the S&P 500 in both 2008 and 2020.

Gargi Chaudhuri, head of iShares Investment Strategy, Americas at BlackRock says investors have opportunities to deploy cash across asset classes in 2024, but they should remain mindful of lingering economic risks.

"Our expectations are for positive, but slowing, economic growth in 2024. We believe that can translate to modestly positive equity index returns – albeit with significant event risk over the course of the year, and with significant differentiation under the hood," Chaudhuri says.