2023 was the year of the recession that wasn't.
2024 is looking to be the year of the hard landing that wasn't.
What is 2025 shaping up to look like?
For guidance we turn to highly-respected economist & award-winning researcher David Rosenberg, founder & president of Rosenberg Research.
David is very concerned that investors, especially the 70 million Baby Boomers, are "all in" the markets.
Boomer portfolios are 60% allocated to stocks. David thinks it should be half(!) of that.
He predicts that when we enter a bear market next -- which he thinks is nearer than most expect -- a brutal consumer recession will ensue.
Here are my key takeaways from the interview:
The global economic outlook is highly varied depending on the region. In the United States, the economy is holding steady, but many sectors are showing signs of stagnation or outright contraction. In contrast, Canada is experiencing a recession when measured by real GDP per capita, and Germany is on the brink of a recession, which could have widespread effects on the European economy. Meanwhile, Asia presents a mixed picture, with Japan flatlining and China undertaking significant stimulus measures to counter a decline in demand.
In terms of equity market valuations, David believes the S&P 500 is overvalued, with a forward price-to-earnings ratio of 21-22x, making it less attractive compared to other global markets. He identifies better value opportunities in markets like Hong Kong, the UK, and Canada. Emerging Asia, including Japan, is highlighted as a particularly appealing region due to steep discounts and strong fundamentals.
David foresees the US Federal Reserve continuing its rate cuts by 25 basis points at each upcoming meeting, despite some debate over its impact. He expects a renewed steepening of the yield curve and sees lower interest rates as his highest conviction trade for the future.
The full impact of the Federal Reserve’s past campaign of rate hikes has been
delayed, David notes, citing historical precedents where it took 30 months or more for a recession to materialize following initial rate hikes. Although a recession has not yet occurred, the effects of the Fed’s aggressive tightening cycle could still be felt in the coming months, as was seen in the tightening cycles of 2004-2007 and 1988-1990.
Consumer spending has been propping up the US economy, largely driven by the equity wealth effect. The personal savings rate has dropped to 5%, half its historical norm, as consumers have become more willing to spend amid rising stock market valuations. This trend is unsustainable in the long run, particularly because 70% of household financial assets are currently tied up in equities, creating a risk of financial instability if the stock market were to correct.
David also voiced concerns over the accuracy of recent US labor market data. While some have described the latest non-farm payroll numbers as a "blowout," he argues that the figures are misleading due to low response rates and unusual seasonal adjustments. There are significant discrepancies between the Bureau of Labor Statistics' data and other employment indicators, such as the ADP employment report, suggesting potential downward revisions in the future.
Another issue David highlighted is the potential impact of rising debt costs on economic growth. As more loans are renewed at higher interest rates, the increased debt servicing burden could weigh heavily on consumers and businesses, leading to further economic strain. Wealth concentration also presents a risk, with 70% of household financial assets in equities and only 8% in bonds. If the stock market were to enter a bear phase, the fallout could be severe.
To navigate these risks, David advises diversification in asset allocation. He suggests increasing exposure to long-dated treasuries, precious metals, and emerging markets. Within equities, he recommends focusing on sectors like aerospace and defense, utilities, and consumer staples, which are more defensively positioned and less sensitive to economic downturns. In his view, while the US stock market remains vulnerable, there are other global opportunities that could provide more stability and growth potential.
For the full interview with David Rosenberg, watch the below video:
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