Navigating the Maze: Unraveling Contradictions in 2024’s Investing Landscape

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Unraveling the Enigma

Wrapped in Contradictions. It would be too easy and too obvious if all the signals said the same thing. But the opposite extreme isn’t fun either, the plethora of counterpoints for every point can leave investors with their heads spinning. And that’s where I think we are right now, wrapped in contradictions.

If 2023 was so unpredictably positive, what will 2024 bring?

Since so much of investing is based on an uncertain future, it’s important to focus on more concrete data when and where possible. One of those datasets is the ISM Manufacturing Purchasing Managers Index (PMI). The nice thing about this index is we have a clear threshold of “good” or “bad”. Any reading below zero in the chart signals contraction, anything above zero signals expansion. The Manufacturing PMI has been squarely in contraction territory since late 2022. 

The Great Debate

But this is one of those very debatable points, with the counterpoint being that a manufacturing PMI in contraction does not always result in recession. Additionally, the services PMI isn’t in contraction, and our economy is more dependent on services than manufacturing. Both of those points would be true. And the counterpoints in response would be: More often than not, prolonged contractions in manufacturing PMI are coupled with recessions, services PMI did briefly dip into contraction in December 2022, and recessions have happened when services very briefly dipped into contraction (e.g., 2020).

Unveiling the Haunting Yield Curve Inversions

See the conundrum of contradictions? Some of the data is more difficult to contradict, however. And that’s the data that keeps me up at night, the pieces that can’t be ignored. One piece that has haunted me all year, and will continue to haunt me into 2024 are the deep and persistent yield curve inversions. 

There’s not just a curve inversion in one place, the curves are inverted in all of the cases illustrated above, and have been for over a year. These aren’t minor inversion either, they’re indisputable, and lasting inversions that send a signal of lower short rates in the near-to-medium term. 

The only thing to debate is why short rates would come down (i.e., why the Fed would cut rates). Will they be able to start cutting rates to simply normalize policy? Or will they start cutting rates because economic data cooled too quickly and concerns over a contraction were mounting? Or worse, because of some sort of event that risks spreading into other parts of capital markets?

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