Untangling Recession Predictions for 2024

Many are predicting a 2024 recession on par with the Great Recession.

But in today’s weekly update, Chief Analyst Adam Galas breaks down data from multiples sources – and walks you through why this worst case scenario is unlikely to occur in 2024.

Adam also shares the success of our latest pick in the Fortress Portfolio and how it compared to last year’s S&P 500 performance. 

To find out what Adam’s prediction is for the recession of 2024, watch the video below or scroll down to read the transcript.

Happy SWAN (sleep well at night) investing,

Brad Thomas Editor, Fortress Portfolio

Welcome, Fortress Portfolio members to another weekly video update.

Now, due to the holidays, it's been about one month since I talked to you.

So, let's do a quick review of the economy because we've had some important data. Then I'll share with you a follow-up on a recent top Fortress recommendation.

Now, I'm sure that a lot of you are confused by this crazy economy.

On one hand, we have traditional metrics and a bunch of surveys saying that the recession is pretty much guaranteed.

On the other hand, we have job reports blowing it out of the water, and the stock market has rallied for nine consecutive weeks.

So, what is going on? Let's take a look…

Is the bond market right? Are we headed for recession or are we headed for that soft landing that Wall Street is so confident in?

Well, the answer is that it's complicated and depends.

But the bottom line is that it’s most likely going to be a softish landing. Let me show you what I mean.

So first, let's take a look here.

(Source: The Daily Shot)

As you can see, this is the Conference Board U.S. Leading Index.

You can see 20 consecutive months of declining fundamentals.

(Source: The Daily Shot)

So, the last time that this happened, as you can see, was in the Great Recession, where there was a record of 24 consecutive months.

Now, I know the first thing you're thinking. And a lot of doomsday prophets are going to look at a chart like this and say, "Aha! Not only is this recession coming… It's going to be another Great Recession, maybe worse.”

Well, let me tell you, that's absolute bullshit.

Anyone who tells you that is either lying, ignorant, or trying to sell you something. Possibly all three.

Because as you can see, the Chicago Fed's Financial Stress Index series shows absolutely no evidence of an impending catastrophe.

(Source: Chicago Federal Reserve via YCharts)

In fact, it is showing financial stress below the average since 1971. That’s what a negative number means.

Now, this consists of 105 financial metrics updated every week, tracked by hundreds of Ph.D. economists at the Chicago Fed.

Everything from shadow banking to bank lending to bank default rates and everything in between.

If there was any kind of impending disaster, we would see it in the data.

But wait, there's more.

We also have the St. Louis Federal Reserve with its Financial Stress Index.

It shows zero being the average level since 1990, and it also shows negative financial stress, meaning below average.

(Source: St. Louis Federal Reserve via YCharts)

So that's evidence of a strong economy.

Now, let's take a look at what I call the God's eye view of the economy: the baseline and rate of change grid from Econ P.I.

(Source: Econ P.I.)

Now, as you can see, the red dot (mean of coordinates) is right in the middle. That means we are pretty much at the historical average for the last 30 years and it's increasing slightly month over month.

(Source: Econ P.I.)

So, as you can see here, this series consists of 18 economic indicators that, since 1990, have combined to correctly forecast every recession.

Let's take a look at the summary for the last three months.

(Source: Econ P.I.)

You can see most things have been getting worse and the average mean of coordinates for all of them have gone from 1.5% above historical average to 2% below.

So, what does that actually mean?

Well, as we can see below, on average, one month before recession, you're looking around 2% above baseline.

(Source: Econ P.I.)

And you can see the leading indicators are 2.5% below. Now, this is where the average is likely to go in the next three months.

So, we’re basically at negative two already and going in the wrong direction.

This is evidence that J.P. Morgan's call that we are currently in a recession may in fact be correct.

And if you look here, you can see the trend certainly for the last two years has been showing weakening economic growth.

(Source: Econ P.I.)

However, what the heck is going on?

Because if you remember, recently we had an upgrade of nearly 3% GDP growth in Q3.

And the Atlanta Fed's GDP forecasting tool, which has been almost perfectly accurate for the last year, is now saying 2.5%, and that's adjusted for inflation.

(Source: Atlanta Federal Reserve)

Now let's take a look at the New York Fed's real-time estimate.

For last quarter, they were saying 2.5%.

(Source: New York Federal Reserve)

Oh, of course, everyone's going to be spending strong before the holidays.

What about Q1 of 2024?

Actually, New York Fed's economists are estimating things are accelerating to 2.7%.

(Source: New York Federal Reserve)

Now for context, the Fed and the Congressional Budget Office estimate that 1.8% is long term economic trends.

So, this is relatively red-hot economic growth.

Let's take a look at the job market.

(Source: Bloomberg)

From Bloomberg, we can see that pre-pandemic – at the end of 2019 – we had 3.7% unemployment and 3.3% wage growth.

So, this was the best job market in 50 years. And then, of course, the pandemic hits and we get all that stimulus and all kinds of craziness for three years.

The most recent report for unemployment came in at 3.7%. So, the same.

But wage growth ended last year at 4.3% and just came in at 4.1%.

So, things have gotten better. It's now the best job market in 54 years. And wait, there's more…

(Source: Bloomberg)

As you can see here, pre-pandemic, we were averaging 170,000 jobs per month. Then in 2023, we were averaging 238,000.

Well, we just came in at 216,000.

What does that actually mean?

Well, according to the New York Fed, 125,000 jobs per month would keep unemployment flat because it keeps up with population growth. Moody's thinks only 40,000 jobs per month are needed to keep unemployment from rising.

In fact, Moody's thinks even if we get a mild recession, job growth will not turn negative and unemployment will not even increase from current levels.

So, what does all this mean together?

Well, my economic model says that we are headed for a -0.2% peak GDP contraction.

What does that mean?

Well, in 2001, we had the mildest recession in history at -0.4%.

For context, the average recession since World War II is -1.4.

So, it looks like the data says that around March to May, we'll get a recession that's half as bad as the mildest recession in history, 7X milder than the average, and 20X milder than the Great Recession.

Now, that would basically mean potentially very little job losses.

Main Street will be just fine, and earnings are expected only to decline by 2%, an unprecedented mild decline.

In fact, analysts are still estimating that thanks to the Magnificent Seven, S&P earnings might increase overall.

So basically, Main Street won't feel this. Wall Street won't feel this.

It will be a softish landing and an unprecedented economic miracle thanks to the productivity and genius of the American worker.

So, what does this mean for Fortress?

Well, let me give you an example highlighting the power of the Fortress investment strategy.

Let me share with you the genius of our recommendations.

Our most recent recommendation was Main Street Capital, which we actually recommended as part of our launch portfolio in January of 2023.

So, how did we do in the first year? A 24% gain.

(Click here to expand image) (Source: FAST Graphs)

Now I know what you're thinking: Wait, didn't the stock market go up about that much, the Nasdaq go up about 50%, and the Magnificent Seven go up 100%? Yes, they did.

But here's the difference. The S&P said 85% of those gains were from price-to-earnings (P/E) ratios going up, not from actual earnings growth.

In contrast, Main Street, as you can see, historical fair value, had 15X earnings.

It was undervalued and stayed undervalued despite going up.

In other words, these gains are sanctified by the righteousness of fundamentals.

But wait, there's more.

Analysts are expecting about 5% earnings decline. This is already baking in the mild recession. Remember Main Street is a business development corporation.

This is a shadow bank. So, it's highly cyclical to the economy.

(Click here to expand image) (Source: FAST Graphs)

But even with that 5% earnings decline, we're looking at 50% upside potential justified by fundamentals in the next two years, another 22% annual returns.

So let me put all of that in context. What have you had been with us from the beginning, went ahead with launch day, and you hold until 2025?

That's three years of owning Main Street.

Now you're looking at nearly 100% gains and a 22% annual return potential.

(Click here to expand image) (Source: FAST Graphs)

These are Buffet-level returns from a blue-chip bargain hiding in plain sight, yielding 7% and paying a monthly dividend.

Now, there is no way the S&P can deliver those guys.

Well, it could theoretically deliver if we had a 1999 market melt-up and an epic stock market bubble.

But again, these are hedge fund smashing, Buffet-like returns.

In fact, hedge funds target 12–18% returns and, on average, charge 5% feed to do it.

How would you like to make Buffet-like 21% returns for three years while getting paid 7%?

Yes. That, from the gold standard of safety in business development cooperation (BDC), is the only BDC to never cut its dividend in a recession, including the Great Recession.

That is the genius of the investment strategy.

We're able to give you amazing gains and a life-changing dividend yield of 7%, with five-year dividend growth of 12% per year.

That is 3X more than the highest inflation in 42 years.

So epic yields, safe yields, and Buffet-like return potential that actually gets delivered on, all sanctified by the righteousness of fundamentals.

That is how we play a different game than the average Wall Street ETF investor. That's how we do hedge fund investing, right?

We get paid to own the world's best companies. We don't pay those 5% fees.

Thank you for watching. I hope you enjoyed this video and I hope you join us next week when we do an update on what's going on with inflation.

What does that likely mean for interest rates in 2024, the stock market, and of course, your Fortress Portfolio?

A reminder, please send us your questions and feedback so I can respond to them in these videos and our monthly issues.

Just a reminder, I can't provide personalized investment advice until next week.

This is Adam Galas, wishing you and your family a safe and healthy, relaxing week full of joy and prosperity.