(Samuel Corum/Bloomberg/Getty Images)
Call it an April slump.
Faltering tech stocks, fears that the Federal Reserve will keep interest rates higher for longer and geopolitical conflict have led to a sharp drop in US markets this month. CNN's Fear & Greed Index, which measures seven barometers of market sentiment, is displaying a solid "fear" reading, down from "greed" just a month ago.
But Philipp Carlsson-Szlezak, Boston Consulting Group's global chief economist, thinks there's too much doomsaying on Wall Street. The economy has been extraordinarily resilient for the past few years – consistently proving the naysayers wrong, he says. For all of the market gloom last week, stocks are still near all-time highs, and this earnings season has been strong.
Carlsson-Szlezak, who co-authored a book on pervasive economic doomsaying, told Before the Bell that the Federal Reserve's wait-and-see approach to inflation and interest rate cuts should be a vote of confidence for this economy and that recession fears are far off from reality.
Read our full conversation below.
This interview has been lightly edited for length and clarity.
Before the Bell: You literally wrote the book on economic doomsaying. Investors have been worrying about the Federal Reserve keeping rates higher for longer. Are their fears overblown?
Philipp Carlsson-Szlezak: We're seeing expectations reset – the forecast for six rate cuts this year has vanished, now it's less than two. The fact that markets are off about 4% relative to that news is not out of the ordinary.
These inflation prints are actually an extreme expression of underlying strength. The vanishing rate cut expectations, well, they're also an expression of strength. If we had to rush to cut rates to prop up the economy, that would be bad. We can wait because this economy is booming and running ahead.
The market volatility, in my view, is a confirmation that those rate cuts aren't coming as fast as was hoped and dreamed about.
But valuations are very high, and the markets are still near record highs. I speak with many institutional investors, and I don't see them folding in fear. I think the market would look different if that were the case.
What about geopolitical worries?
It's so easy to focus on predictions of a dire meltdown. We have a war in Europe, that is an enormous shift in the geopolitical landscape, an enormous humanitarian shock and an enormous disruption to the European business order. And there is no recession. Isn't that telling us something about how high the bar can be for geopolitics to flow directly through to the macroeconomy?
A similar point can be made about rising tensions in the Middle East. So far, they have not pushed down a major Western economy. They have the potential to do so, and this is the difficulty with geopolitical risk. If that feeds into an oil price rally and a sharp movement in the oil market, we're talking about something different. But recall that at the start of the Ukraine war, oil also went up a lot. And did we get a recession in the US from that? Did it pull down the growth numbers in the US? It did not.
I'm not saying there isn't a risk. And I'm not saying we should look away and shrug off these many geopolitical crises. They all have the potential to magnify and amplify and grow.
But it's not really possible to say that the real economy has taken a hit from either war in either Ukraine or the Middle East.
Are investors paying too much attention to swings in monthly economic data?
Some of the short-term predictability and forecast ability for the economy is very poor. Economics isn't really constructed like a natural science in that way.
But I quibble with the notion that markets can't look through this. As I've said, we're still near record numbers in the equity market. If you believed all the doomsaying about impending stumbles and the economy falling off a cliff edge, then we wouldn't have these valuations and these prices in various financial markets.
Markets have to react to something. Somebody prices everything at the margin. Of course there's a reaction to data flow. But I don't think, for example, that the three consecutive months of inflation surprises to the upside have pushed the equity market into a reset or a correction.
So what comes next? We can't stave off a cyclical recession forever.
When will the next recession be? You and I both know, that's so hard to pinpoint, but I don't think it will be in 2024. It would take a big shock to deliver a recession this year.
What are some economic themes you're watching in the back half of 2024?
I think we're still likely to get a rate cut or two. The labor market has cooled. It hasn't cooled as much as it was expected to, but job openings are down. I also think consumers will continue to be in a position to spend.
The US consumption economy is diversified between goods and services and that diversification has provided a steady floor for us. When services were weak, goods were exceptionally strong. Now that goods are off their overshoots, services are back to trend and carrying the day. So I see little reason to think there is a pocket of weakness that will tear down the whole consumption story.
There are gyrations under the hood, but when you look at the aggregates, it adds up to great numbers.
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