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Sources: GDP estimates provided by Strategas and Piper Sandler
Are there risks involved with this spending?
Yes, excess government spending fuels two key risks, both of which could lead to higher yields.
If recession isn’t the top risk of 2024, then it’s a reacceleration of inflation. Renewed inflation concerns would likely be driven by a reacceleration of growth in tandem with substantial fiscal support. In this case, we’d expect equity market breadth to widen to include cyclical sector stocks like industrials and energy. Long duration bonds may see some pain if rates move higher.
It’s also worth noting that every time since 1944, when a presidential incumbent was on the ticket the S&P 500 ended the year higher. The government is also well funded – a chart of the Treasury General Account (TGA) is provided below – and the balance is expected to rise with tax collections in April. We expect the government to spend a majority of the TGA through the end of the year. Past TGA drains have coincided with risk-on sentiment.
It’s important to remember, avoiding a recession in 2024 does not herald a soft landing. Instead, we see the economy overheating given that core inflation is still high – and that may be a more pronounced risk for the economy and markets in the medium term. We pointed out this possibility in our 2024 outlook – Choose your own adventure – and also see inflation-linked assets like TIPS and commodities supported by higher prices. This scenario would likely extend “higher for longer” rates so, on the duration front, consider remaining neutral or lower while taking risk in higher yielding corporate bonds.
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