Optimism
about
the
economy
has
been
one
of
the
big
drivers
of
the
stock
market’s
latest
rally,
with
investors
betting
the
US
will
get
an
often-hoped-for
but
rarely-seen
soft
landing.

In
practice,
this
would
mean
the
Federal
Reserve
has
raised
rates
enough
to
slow
economic
growth
and
beat
inflation
while avoiding
a
recession
.
Such
a
scenario
could
mean
the
Fed
is
just
months
away
from
cutting
interest
rates.

Many
in
the
markets
talk
about
a
soft
landing
being
in
the
cards
for
2024.
But
it’s
possible
that
when
the
fourth-quarter
gross
domestic
product
(GDP)
report
is
released
Thursday
morning,
it
will
show
we
already
had
one,
or
that
one
is
just
around
the
corner.

Has
a
soft
landing
already
happened?
Or
is
something
else
ahead?
Here’s
what
investors
need
to
know.

Q4
GDP
Forecast
to
Show
Slowing
Growth

Economists
are
expecting
GDP
figures
to
show
the
US
economy
grew
at
a
1.5%
rate
on
a
quarterly
basis
during
the
fourth
quarter,
according
to
FactSet’s
consensus
estimates.
That’s
significantly
slower
than
the
third
quarter’s
4.9%
growth,
but
about
in
line
with
2022’s
annual
growth
rate
of
1.9%.

In
a
research
note
released
Monday,
economists
at
Bank
of
America
said
they
expect
Thursday’s
data
to
paint
a
picture
of
“a
slowing
economy
at
year-end.”
They
noted
the
economy
is
still
resilient,
however,
“led
by
consumer
spending
on
the
back
of
a
tight
labour
market,
higher-than-expected
holiday
spending,
and
moderately
strong
balance
sheets.”

However,
not
all
economists
are
convinced
that
a
soft
landing
is
either
here
or
on
its
way,
but
rather
think
a
recession
could
still
be
in
play.
For
example,
short-term
Treasury
bond
yields
are
still
higher
than
long-term
yields –
a
dynamic
known
as
an
inverted
yield
curve –
which
has
historically
presaged
a
recession.

Meanwhile,
certain
economic
indicators
have
contracted,
which
could
signal
that
a
less-than-ideal
landing
is
already
behind
us.
On
the
other
hand,
a
potential
slowdown
in
consumer
spending
could
mean
a
soft
landing
is
still
further
ahead.

Hopes
of
a
Soft
Landing
Replace
Recession
Fears

A
year
ago,
many
investors
were
convinced
that,
with
the
Fed
in
the
middle
of
its
most
aggressive
series
of
interest
rate
increases
in
history,
a
recession
was
likely
for
2023.

When
the
regional
banking
crisis
hit
last
March,
it
was
widely
believed
there
was
no
question
about
whether
an
economic
downturn
was
ahead,
but
a
matter
of
how
deep
it
would
be.
Instead,
the
economy
roared
back
during
the
third
quarter,
led
by
a
red-hot
jobs
market
and
strong
consumer
spending.

But
by
year-end,
economic
growth
was
moderating
and
inflation
was
cooling.
After
strong
December
jobs
data,
Treasury
Secretary
Janet
Yellen said a
soft
landing
had
been
achieved
.
The
prevailing
sentiment
on
Wall
Street
is
a
soft
landing
is
imminent.
That
optimism
has
helped
propel
stocks
to
near
their
highest
level
in
two
years.

Stephen
Bartolini,
who
manages
the
US
core
bond
strategy
at
T.
Rowe
Price,
is
among
those
who
think
the
economy
has
already
landed.

“This
is
what
a
soft
landing
looks
like,” he
said
recently.
 “We’re
living
it.”

Timing
of
Fed
Rate
Cuts
Could
Ride
on
a
Soft
Landing

Changes
to
the
economic
outlook
could
have
major
implications
for
investors,
especially
ahead
of
a
pivotal
Fed
meeting
in
March.
Market
watchers
are
eagerly
awaiting
any
signal
that
the
central
bank
is
ready
to
declare
success
and
pivot
to
rate
cuts
after
11
hikes
in
the
past
two
years.

A
month
ago,
bond
futures
traders
saw
a
roughly
75%
chance
that
the
Fed
would
begin
cutting
rates
at
that
meeting.
Today
those
chances
have
dropped
to
less
than
40%,
according
to
the
CME
FedWatch
Tool.

A
soft
landing
scenario
could
lead
to
the
Fed
cutting
rates
three
times
this
year,
as
its
forecasts
at
its
December
meeting
suggest.
A
hard
landing,
wherein
the
economy
tips
into
recession,
would
likely
mean
more
aggressive
rate
cuts,
while
a
reacceleration
of
growth –
which
could
threaten
the
progress
on
reducing
inflation –
could
push
cuts
further
off.

A
Consumer
Slowdown
Could
be
Coming

Some
analysts
see
signs
of
more
change
to
come
in
the
economy
before
all
is
settled,
however.

“I
don’t
think
we’ve
necessarily
found
that
landing
yet,”
says
Jeffrey
Roach,
chief
economist
at
LPL
Financial.
He
bases
that
argument
on
consumer
spending
data,
noting
that
spending
on
services
relative
to
goods
hasn’t
yet
recovered
to
pre-pandemic
levels.

If
services
spending
does
recover
and
goods
spending
pulls
back
as
pandemic
disruptions
continue
to
fade
over
the
next
few
quarters,
Roach
says
that
could
mean
a
net
slowdown
in
consumer
spending
overall.

“That
could
provide
the
timing
where
we
finally
land.
We’re
slowing
to
a
walk
and
catching
our
breath
[…]
we’re
still
in
a
little
bit
of
this
adjustment
period,”
he
says.

Will
There
be
a
Not-so-Soft
Landing?

This
argument
applies
at
the
extreme
end
of
the
spectrum.
Some
say
recent
declines
in
some
key
economic
indicators
show
a
bumpier
landing
has
already
happened.

Denise
Chisholm,
director
of
quantitative
market
strategy
at
Fidelity,
notes
that
for
the
better
part
of
two
years,
earnings
growth,
gross
domestic
income,
and
real
income
have
all
contracted,
and
GDP
has
come
close
to
contracting.

Those
indicators
aren’t
signs
of
a
perfect
soft
landing,
she
recently
told
Morningstar.
Rather,
she
thinks
those
conditions
point
to
a
“hard
soft
landing,”
or
a
“very
soft
hard
landing.”

She
adds:
“we
need
to
be
more
open-minded
that
we
have
seen
recession-like
conditions
without
a
recession.”

Market
data
tells
the
same
story.
The
peak-to-trough
contraction
of
nearly
30%
in
the
S&P
500
and
roughly
40%
in
the
Nasdaq
“was
right
in
line
with
typical
hard
landings
where
we
have
seen
recessions,”
Chisholm
says.
The
silver
lining?
That
might
be
in
the
rearview
mirror
already.
“We
may
have
already
landed,”
she
says.

It’s
Too
Soon
to
Declare
Victory

Preston
Caldwell,
Morningstar’s
chief
US
economist,
says
that,
while
a
soft
landing
is
currently
“quite
possible,”
it’s
not
guaranteed.
Inflation
has
fallen
meaningfully
and
is
approaching
the
Fed’s
target
of
2%.
Future
improvements
in
housing
inflation
should
push
the
annual
inflation
rate
over
the
line.

Ultimately,
however,
the
success
of
the
so-called
“last
mile”
in
the
inflation
fight
“is
contingent
on
monetary
policy
calibrating
the
economy
appropriately.”
In
other
words,
the
Fed
still
needs
to
get
it
right.

In
an
overheating
scenario,
for
instance,
inflation
would
remain
above
target
and
interest
rates
would
remain
high
for
too
long.
“Then
you
start
getting
into
issues
of
financial
fragility
and
maybe
something
breaks
in
the
economy,”
Caldwell
says.
That
could
mean
a
recession.

There’s
also
the
issue
of
lags.
It’s
still
possible
some
of
the
previous
rate
hikes
have
not
yet
rippled
through
the
economy,
which
means
there’s
still
uncertainty
about
how
tight
or
loose
monetary
policy
needs
to
be.
That
uncertainty
“is
what
makes
the
soft
landing
not
100%
assured
right
now,”
Caldwell
says.

The
bottom
line?
“I
wouldn’t
declare
victory
until
we
get
down
to
2%
inflation
in
year-over-year
terms.”

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