Investors' Fears Unwarranted: A Contrarian Perspective

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It seems like we're experiencing an April slump.

Tech stocks are struggling, concerns about the Federal Reserve keeping interest rates high, and geopolitical tensions have caused a significant decline in US markets this month. CNN's Fear & Greed Index, which gauges market sentiment, currently shows a high level of "fear," a shift from "greed" just a month ago.

Despite the negative outlook on Wall Street, Philipp Carlsson-Szlezak, the global chief economist at Boston Consulting Group, believes there is too much pessimism. He points out that the economy has been remarkably resilient in recent years, consistently proving critics wrong. Despite recent market turbulence, stock prices remain close to record highs, and this earnings season has been robust.

Carlsson-Szlezak, who co-authored a book on pervasive economic doomsaying, believes that the Federal Reserve's cautious approach to inflation and interest rate cuts should be seen as a positive sign for the economy. He thinks that fears of a recession are not grounded in reality.

This interview has been edited slightly for length and clarity.

Before the Bell: You are known for your expertise in economic doomsaying. Many investors are concerned about the Federal Reserve maintaining higher rates for an extended period. Do you think their worries are exaggerated?

Expectations have shifted - the prediction of six rate cuts this year has disappeared, now it's less than two. The market being down about 4% in response to this news is normal.

The high inflation numbers actually show a strong underlying economy. The decrease in rate cut expectations is also a sign of strength. It's good that we don't need to quickly lower rates to support the economy. We can wait because the economy is doing well.

The market volatility is a sign that rate cuts may not happen as quickly as expected. However, despite high valuations, the markets are still close to all-time highs. Speaking with institutional investors, I don't see them panicking or giving up. If they were, the market would likely show more drastic changes.

Geopolitical concerns are often at the forefront of our minds. With ongoing conflicts and shifting landscapes, it's natural to fear the worst. The war in Europe, in particular, has caused significant humanitarian and economic disruptions. Surprisingly, despite these challenges, there is no sign of a recession. This raises an important question: How significant must geopolitical events be to impact the overall economy?

Rising tensions in the Middle East have not yet caused a major Western economy to decline. However, there is a potential for this to happen, which is the challenge with geopolitical risk. If these tensions lead to a significant increase in oil prices and a drastic shift in the oil market, the situation could change. It is important to note that during the beginning of the Ukraine war, there was a significant rise in oil prices. Despite this, there was no recession in the US as a result, nor did it negatively impact the growth numbers in the US.

It is crucial to acknowledge that there is still a level of risk present. We cannot ignore or downplay the various geopolitical crises occurring, as they all have the potential to escalate and expand in magnitude.

It's hard to determine whether the real economy has been affected by the wars in Ukraine or the Middle East.

Do investors focus too much on fluctuations 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 disagree with the idea that markets cannot see beyond this. We are still seeing near record numbers in the equity market. If all the negative predictions about economic downturns were true, we would not be seeing these high valuations and prices in different financial markets.

Markets need to respond to various factors, with prices being determined at the margin. Data flow can trigger reactions in the market, such as inflation surprises. However, three consecutive months of inflation exceeding expectations have not caused a significant market reset or correction.

Looking ahead, it is inevitable that we will eventually face a cyclical recession.

It's difficult to predict when the next recession will occur. I personally don't believe it will happen in 2024, as it would require a significant event to trigger a recession this year.

What economic trends are you keeping an eye on for the second half of 2024?

I believe there will be a rate cut or two in the near future, especially since the labor market has cooled. Although not as much as anticipated, job openings have decreased. Despite this, I predict that consumers will still have the ability to spend.

The US consumption economy is balanced between goods and services, which has helped to maintain stability. When services were struggling, goods performed well. Now that goods have normalized, services have returned to their usual trend and are driving the economy. Therefore, I don't see any significant weaknesses that could threaten the overall consumption outlook.

There are gyrations under the hood, but when you look at the aggregates, it adds up to great numbers.

House passes legislation that could ban TikTok in the US amid high-stakes vote on foreign aid

A significant development occurred on Saturday regarding the potential ban of TikTok in the US. House lawmakers approved a bill that includes measures targeting the app as part of a broader aid package for Israel and Ukraine. This information was reported by my colleague Brian Fung.

The vote, which was bipartisan and resulted in a 360-58 outcome, is another setback for TikTok in Washington. The social media company, which has 170 million users in the US, is currently facing challenges as it tries to survive under the ownership of ByteDance, its Chinese parent company.

The bill approved by the House over the weekend is very similar to the one passed in March. This bill aims to ban TikTok from US app stores unless it is acquired by a new owner promptly.

Policy analysts anticipate that the Senate will address the aid package promptly, making it highly likely to be approved. President Joe Biden has indicated that he would sign the TikTok legislation into law if it is presented to him.

Tesla is recalling nearly 4,000 Cybertrucks because of a sticking accelerator pedal. My colleagues Chris Isidore and Peter Valdes-Dapena reported this issue.

The reason for the issue, as explained by the regulator, was the use of soap.

The NHTSA stated in the recall document that an unauthorized modification added soap as a lubricant to help with assembling the pad onto the accelerator pedal. This soap residue ended up decreasing the grip of the pad on the pedal.

Tesla has not specified the number of Cybertrucks it has made so far. However, the company has mentioned that production of the vehicle will increase gradually. The first deliveries of the Cybertruck took place in late November.

The National Highway Traffic Safety Administration (NHTSA) announced a recall that includes all Model Year (MY) 2024 Cybertruck vehicles produced between November 13, 2023, and April 4, 2024.

This means that most, if not all, of the 3,878 trucks being recalled are currently being driven on roads in the US.

In contrast to previous Tesla recalls, this particular one cannot be resolved through a quick over-the-air software update. Tesla will need owners to follow instructions in letters and take their Cybertrucks to service centers for a free repair.

Editor's P/S:

The article provides a nuanced analysis of the current economic climate, highlighting the persistent pessimism despite signs of resilience. Philipp Carlsson-Szlezak, an expert in economic doomsaying, argues that fears of a recession are exaggerated and points to the strong economic performance amid geopolitical tensions and the Federal Reserve's cautious approach to inflation.

Despite market volatility and concerns about interest rate hikes, Carlsson-Szlezak believes that the economy is in a healthy state, with stock prices close to record highs and strong earnings. He emphasizes the importance of not overreacting to short-term economic data fluctuations and the need to focus on the long-term trends. While acknowledging geopolitical risks, he cautions against being overly pessimistic about their potential impact, citing the lack of significant economic disruptions caused by recent conflicts. Overall, the article provides a balanced perspective on the current economic outlook, urging investors to avoid excessive pessimism and to focus on the underlying strength of the economy.