Why Wasn’t there a Recession?

To say that everyone was expecting a recession going into 2023 is an understatement.

This headline is from October. Poetically, and something few people were predicting at the time, the S&P 500 had bottomed five days before this ran.

So, how did everyone get 2023 so wrong? Michael Cembalest hit on this in his 2024 outlook.

Monetary policy is tighter but below the level of real rates that led to prior recessions; corporate cash flow is still in good shape, unlike the cash flow deficits which preceded prior recessions; and the corporate sector termed out debt maturities before the rise in rates, partially immunizing itself from the interest spike that preceded prior recessions. Private sector credit creation was similar to prior cycles, but debt servicing risks are lower for companies and households that termed out maturities.

Even though the Fed aggressively raised rates, monetary policy wasn’t as restrictive as it was in the lead-up to prior recessions (not including 2020). That’s not to minimize their efforts of cooling inflation, only putting in perspective that historically, they just weren’t that tight.

And even if they raised rates to 6% or higher, it’s hard to say for sure that we would have had a recession. Almost 90% of S&P 500 debt is long-term fixed, which is why net interest costs didn’t go up with interest rates. Paradoxically, thanks to all the cash on the balance sheets actually earning something, net interest costs went down!

Maybe those calling for a recession in 2023 were just early. Time will tell. Josh and I are going to cover this and much more on tonight’s WAYT.

Josh and I are going to cover this and much more on tonight’s What Are Your Thoughts?