Equity markets have been in retreat so far in 2024 as investors take profits following the strong run in the fourth quarter. Sentiment has been driven by concerns that an economic slowdown could hit corporate earnings in the coming quarters.
On Wednesday, early index futures trading appeared to indicate a flat market open following two days of losses for the S&P 500. The SPDR S&P 500 ETF SPY, an exchange traded fund that tracks the senior index, was up 0.1% in pre-market trade, while the Invesco QQQ Trust QQQ, which tracks stocks on the NASDAQ 100, was up 0.2% following a two-day loss of 1.7%.
Since late October, risk sentiment has been riding high, with many stock indexes trading close to record highs.
But niggling doubts about whether the U.S. economy can avoid a recession in 2024 surfaced earlier this week following purchasing manager data that showed that activity in the manufacturing sector had slowed further during December.
Nomura Anticipates Recession In Second Half Of 2024
Analysts at investment bank Nomura believe the U.S. economy will continue to shrink and be in a “mild recession” in the second half of the year, with tight financial conditions weighing on cyclical sectors such as housebuilders and consumer discretionary items such as automobiles.
“We do not see a clear catalyst for financial stress, but growth downturns can reveal hidden vulnerabilities or ‘break’ otherwise healthy markets,” said Nomura’s lead analyst Aichi Amemiya.
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He added: “The past three recessions have coincided with equity sell-offs of 30% or more, and even past mild recessions typically lead to some credit stress.”
Also Read: ‘Rapid Descent’: Mortgage Rates Are Shocking Experts. Is Housing Getting More Affordable?
Vulnerability of Homebuilders
Households and businesses had been well-insulated from rising interest costs so far, the analysts said. But higher borrowing costs will increasingly weigh on consumer spending.
“Mortgage rates remain elevated, and this is likely to lead to renewed weakness in housing markets,” Ameniya said. “Homebuilder sentiment has declined sharply, and we see early signs of a slowdown in single-family construction and new home sales.”
Homebuilders were among the best-performing stocks of 2023 despite higher interest rates forcing average mortgage rates up to a peak of 7.79% in October.
While the average 30-year mortgage rate has now fallen to 6.61% it remains elevated for new buyers. Current mortgage holders were insulated by fixed rate deals, but when these come up for renegotiation, they will be higher.
DR Horton DHI is down 2.7% over the past two days, but was up 60% in 2023. Lennar LEN has fallen 2.3% so far in 2024, but rose 55% last year. Pulte Group PHM, which constructs higher-end homes, was up 111% in 2023, but has lost 2.7% so far in 2024.
The iShares U.S. Home Construction ETF ITB, which tracks shares of homebuilders, trade merchants and homeware retailers, is down 3.5% over the past two days after rising 62% in 2023.
Deteriorating Labor Market
The December PMI data showed payrolls were cut for a third-consecutive month as firms grew more cautious.
Chris Williamson, chief business economist at S&P Global Market Intelligence, said: “The fourth quarter has consequently seen factories reduce employment at a pace not seen since 2009, barring only the early pandemic lockdown months.”
The latest official jobs data from the Labor Department will be published on Friday, with analysts expecting around 170,000 new jobs created in December. In November, the data showed 199,000 jobs were created, but the unemployment rate crept up to 3.7%.
Normura’s Aichi Amemiya said: “Slower hiring and a faster run-rate for layoffs suggest a further increase in the unemployment rate. We expect the unemployment rate to move above 4% in the first half, with a sharper increase only occurring later after the onset of recession.”
Consumer Belt-Tightening
While consumers have, so far, been supported by robust income growth, as labor markets continue to cool consumers are likely to put the brakes on spending.
Regarding consumer credit, Nomura found little evidence of stresses in the mortgage market, however, credit card interest rates are rising and delinquency rates are up. Added to this, the resumption of student loan repayments after a three-year pandemic-related hiatus will add to household financial burdens.
“Consumer surveys demonstrate that higher borrowing costs and tighter lending conditions are weighing on demand for vehicles and other large durable goods,” said Amemiya.
Carmakers and sellers have been a weak point of the first couple of days of 2024, with used vehicle dealer CarMax KMX down 5.5% in two days, Ford Motors F off 5.1%, and car parts maker Dana Inc DAN falling 8%.
Now Read: US Manufacturing Takes A Hit: Longest Downturn Since Early 2000s, Yet Exceeds December Predictions
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