We thought we would pass along a few thoughts from our Chief Investment Office, Larry Adam

The most talked about recession in history has yet to materialize. Many economists have stopped waiting for the delivery and have revised the menu. We still believe that a recession will start in 2Q, but it will likely be the mildest ever. Indeed, it may be so mild that markets barely notice it—just a morsel to whet the appetite for the recovery to follow. We expect the recession to be mild because there are no excesses in the economy, and like a rotisserie oven, many parts of the economy have been rotating from hot to cold independently over the last few years. Case in point: in 2023, travel and leisure were hot while housing cooled. This rotation reduces the potential for all components of the economy becoming slower at once—the usual recipe for a more severe recession. Even with a mild recession, a recovery by year end should help US GDP warm to a ~1% growth rate for the entire year.

Equity market volatility returned to its pre-pandemic level in 2023 as supply chains normalized and inflation moved on a clear decelerating path. However, volatility is likely to pick up in a market that’s already priced in the good news due to elevated geopolitical risks and the US presidential election. Interest rate volatility is likely to remain elevated as fiscal dynamics remain in focus and as the market remains disconnected from the Fed over the path of its key policy rate. Overbought conditions may lead to a near-term pullback. However, we remain cautiously optimistic over the next 12 months. Earnings should tread water as the macro backdrop becomes more challenging, while the earnings multiple is likely to get only a modest boost from falling bond yields. We prefer US over international equities, remain constructive on emerging markets (India in particular) and expect small caps to outperform.

Oil prices have eased from their recent peak. Although OPEC+ nations have attempted to stabilize prices with voluntary production cuts, ramped up production from non-OPEC+ nations and the US has temporarily provided an offset. With the US government’s need to refill the Strategic Petroleum Reserve likely to put a floor under falling oil prices and the prospect of better demand once a global recovery is in sight, oil prices should climb back toward our $85/barrel forecast in the coming year.

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