A Hard Look at a Soft Landing

Executive Summary

In this article, I’ll cover some of the key stories of 2023 and then focus on the likelihood of a soft landing for the economy with a look at monetary policy, economic growth, the earnings outlook, and geopolitical risks.

Monetary Policy

  • In two years, the Fed raised rates 11 times from zero to 5.25-5.50% at the fastest pace in four decades.
  • Fed rate plateaus typically average 3 months but that number has stretched in the recent decades to as long as 15 months.
  • Rate cuts are typically correlated with recessions. Productivity gains and investment in technology helped avert a recession in 1995 after Greenspan raised rates 7 times.

Economic Growth

  • Leading Economic Index (LEI) is still deeply in recession territory and likely why cyclicals are struggling. The Conference Board believes GDP will contract in Q2 and Q3 as a result.
  • Employment remains strong and resilient as companies hoard labor.
  • Consumer confidence is improving, especially for present conditions.
  • Retail sales remain constant after adjusting for inflation because consumers have drawn down savings. There are limits to how much can be drawn down but there’s enough savings for the trend to continue in 2024.
  • Housing affordability is terrible, but fixed investment and housing services continue to grow in 2023 with the trend improving throughout the year.

Earnings Outlook

  • Earnings growth is on the shoulders of a handful of companies.
  • FactSet believes earnings will grow 4.6% in Q1, 9.4% in Q2, 7.7% in Q3, and 21.3% growth in Q4.

Geopolitical Risks

  • Middle East is a powder keg waiting to burst and it’s having a negative effect on maritime trade routes.
  • China’s economy continues to languish due to a clamp down on residential speculation. Monetary Policy is shifting to support versus restrict with a reserve ratio cut last week and plans to help commercial loans.
  • Statistical evidence shows that it doesn’t really matter too much which president wins and, typically, the S&P 500 has a positive return in an election year with an average gain of 11.28% since 1928.


Based on the evidence, the probability of a soft landing is high. There are still plenty of headwinds and the outlook for a soft landing is fragile. These topics will be discussed in further detail within the article, but the key will be corporate earnings and the job market. Those two are intrinsically intertwined. Corporate earnings growth is being held up by a small handful of tech companies. It’s no wonder market performance has been heavily influenced by these companies.

As in navigation, if we want to know where we’re going, we need a reference on where we’ve been. The difference between Point A to Point B equals distance traveled. So, before we look at the year ahead, it’s a good idea to look at the year behind. Last year was a tough year in finance. There were bank failures, China’s falling real estate and stock market, high prices and an aggressive Fed to contend with, weak earnings growth, and more. Anemic performance in stocks for most of the year was overshadowed by outsized gains in large-cap tech and telecommunications company stock performance due to the new awareness of AI. Very few companies have been able to cash-in on the new frontier, and for now the investment gold-mine has been found in picks and shovels of the movement as companies like Nvidia reap the benefits of large-investment in chips that can power generative artificial intelligence.

The Year Behind

There were 5 bank failures in 2023 with $548B in assets according to the FDIC – two of which sent the S&P to the lows for the year in March. Losses in bonds and an exodus of investors from these institutions to money-market funds, Treasuries, and CDs made this possible. First Republic Bank in May was the last major bank to fail. While Heartland Tri-State Bank and Citizens Bank failed later in the year, their assets were much smaller in proportion to the other three.

China was expected to add to post-COVID reopening growth; however, the government cracked down on speculation in real estate which has caused the current real estate crisis there. It’s estimated that real estate is 20-25% of their economy according to CNBC as of December 2023. Recently in a Washington Post Article last week, “the Hong Kong court has ordered Evergrande Group, the worlds most indebted real estate developer, to liquidate more than $300 billion in liabilities and hundreds of unfinished apartment complexes across the country.” Shepard, Christian. “Adding to China’s economic troubles, property giant ordered to liquidate.” Washington Post, January 29, https://www.washingtonpost.com/world/2024/01/28/china-evergrande-propert....

The latest development comes after the People's Bank of China reduced its reserve requirements rate by 50 basis points last week, a move estimated by Reuters to inject $140 billion in liquidity. Expectations are high for further announcements regarding central bank policies aimed at stabilizing the residential market in the coming week. Assessing the depth of the housing crisis in China proves challenging, given that official data only covers housing prices set by city officials for new developments and excludes the secondary market. Nevertheless, analysts believe that China's housing market correction is unlikely to precipitate a crisis akin to the one experienced in the United States between 2005 and 2008, largely due to stricter regulations governing loan-to-value ratios in China.

Surging energy prices in the summer, heightened geopolitical tensions stemming from the conflict between Hamas and Israel, and positive economic developments in the third quarter raised concerns about the potential resurgence of inflation after several months of disinflation. Throughout the quarter, Federal Reserve officials maintained a firm stance on policy, but a shift occurred in the first few weeks of October. Traders closely monitored the 10-year Treasury yield, which nearly reached 5% in the fourth quarter. With each uptick, stocks experienced a sell-off, evident in the correction observed in the S&P 500. The inverse relationship between interest rates and the equal-weight S&P 500 became more apparent when excluding the influence of mega-cap tech stocks. Following the peak and subsequent correction in November, an "everything rally" ensued.

Earnings made a comeback in the second half of 2023 ending a mild earnings recession. The third quarter was estimated to be a contraction in earnings but by the end of the season, companies in the S&P 500 were able to turn corner and earnings grew 5 percent according to Business Insider. Turning to the end of 2023, on January 26th, FactSet is reporting the blended (estimated combined with the results from companies that have reported) fourth quarter earnings growth rate for the S&P 500 year-over-year is a negative 1.4%, which would be the fourth in five quarters that the index reported a year-over-year decline in earnings. FactSet is still optimistic this may reverse as we get six mega-cap companies reporting earnings last week which have had strong results in 2023, and because the financial sector has dominated the early announcements (Financials have reported the largest earnings decline this quarter at -19% according to FactSet).

Finally, to comment on 2023, the bulk of returns were made in the magnificent seven (Nvidia, Apple, Microsoft, Alphabet, Amazon, Tesla, and Meta). These seven companies constitute a $12 trillion in value of the S&P 500’s $40.04 trillion value achieved on December 31st – so 7 companies make up 30% of the total value of the cap-weighted index as investors became enamored by the possible returns of investing in artificial intelligence. Note over the past ten years, it isn’t common to see the same sectors outperform year after year; however, technology’s leadership has been prevalent as seen below.

The year behind us was a difficult one to navigate as the Fed was raising interest rates, shrinking liquidity, and talked a tough game on inflation. 2022 had brought about an influx of job layoffs that spilled into 2023, but employment remained strong overall. Gains in a small group of technology and telecommunications companies masked weakness in the broad market for 5/6s of the year until the Santa Clause Rally. The introduction of AI with Microsoft’s investment in OpenAI in the first quarter sparked investor awareness of a new technology to invest in, but today that largely remains in picks and shovels of a small group of semiconductor manufacturers. The opportunities for technology to cause disruptions and productivity gains are present, especially for electronic vehicles, self-driving cars, and research. Generative AI is generating value now according to a 2,800 global leadership survey conducted by Deloitte. The survey showed 83% respondents use text AI, 62% surveyed use AI for code generation, 56% with audio production, 55% using it for image tools and generating creativity, 36% surveyed use it in video production, and 26% responded they use AI to create 3D models. Despite housing sales languishing, an inverted yield curve, bank failures, an earnings recession, and an ongoing manufacturing recession, stocks advanced, earnings turned positive, and GDP turned positive. Yes, the consumer has tapped into those COVID savings reserves, but the consumer largely remains employed.

The Year Ahead

Despite overall optimism about the economy, there are still persistent headwinds. Certain sectors that faced challenges in 2023 are encountering similar difficulties during the current earnings season. Despite some anemic growth figures, the prevailing consensus points towards a Soft Landing. Although I typically caution against following the consensus, it's worth noting that the public tends to err only at the extremes, being generally accurate most of the time. While challenges such as high interest rates, low housing affordability, and geopolitical risks persist, the economic outlook remains stable, supported by a resilient consumer base and a Federal Reserve that is mindful of balancing the risks of inflation against those of causing rising unemployment. It’s time to take a hard look at a soft landing.

Monetary Policy

We start off this year with a plateau in the Federal Funds Target Rate and the debate on when the Fed may cut rates. While the Federal Reserve Bank continues to allow its balance sheet to shrink, aka “quantitative tightening”, the Fed has paused raising short-term rates it charges lending facilities. The last hike was a quarter point on July 26 to the target range of 5.25% to 5.50%. Just two years ago, that rate was 0.0%. In one and a half years, the Fed raised rates 11 times to fight inflation. As of January 30th, the CME FedWatch Tool, created by the CME Group to track Fed Fund Futures, shows that investors bet the Fed has a 43% chance to cut rates by a quarter point. This is down from the end of December when investors gave a cut a 73.4% chance. This explains somewhat why interest rates have been on the rise and for the small dip in stocks over the first two weeks of the year as stronger economic growth and comments from Fed officials have eased fears over an impending recession and for the need to cut rates soon. Rising inflation and energy prices have also influenced investor perception over the past couple of weeks. The CME FedWatch Tool shows investors have predicted 6 rate cuts in 2024, but central bankers are saying it will likely not happen until this summer.

The Fed began building its assets during COVID with those assets peaking at around $9 trillion. Due to quantitative tightening, the balance sheet has shrunk to approximately $7.7 trillion and the communication from Fed officials is that there’s no intention to stop now. When the Fed shrinks its assets, it’s drawing cash out of the system. The last time they tried this was in 2018 when the Fed was aggressive, causing a 20% correction in the S&P 500. The Fed will announce its January policy decision Wednesday where they may shed more light on this subject, but for now there’s no communication and so steady-as-she-goes as the Fed rolls off debt investing from its balance sheet.

Fed Balance Sheet Assets (in millions)

Source: fred.stlouisfed.org

How Long do Fed Plateaus Last?

Not long typically. The longest since the 1950s was 15 months when the Fed made its last hike in June 2006 and then cut in September 2007. The shortest was one month. On average, the plateau is 3 months before the Fed pivots and cuts rates post after its last hike. In the past few decades, we’re seeing that average stretch. I believe it’s because the Fed has more tools now in its toolbox such as buying long-term bonds, repurchase agreements, and reserve ratios allowing it to rely less on its interest rate policy alone to guide monetary policy. None of the new voting members of the 2024 Federal Open Market Committee (FOMC) have indicated a cut is any time soon. The most dovish of the group, San Francisco President Daly, said last week that it is premature to think a rate cut is around the corner. Given no cut last week and the next meeting is March 20th, the likelihood of a cut is slim to none. One the one side, the Fed knows it acted late to inflation and it will want to make sure that battle has concluded before getting ahead of any preemptive rate cutting to end this Fed rate plateau.

Do Rate Cuts Correlate with Recession?

Most of the time, when the Fed is cutting rates it’s already too late for the economy, usually because company earnings have already peaked. Company earnings and labor productivity are the key to maintaining a soft landing. The last time the Federal Reserve cut rates following a restrictive policy cycle and the economy did not fall into recession was in 1995. In 1995, the economy grew despite Alan Greenspan raising rates 7 times from 1994 to early 1995. Stocks were only up 1.33% in 1995 with a -9% drawdown. That’s minimal compared to what the S&P 500 experienced in 2022. GDP growth bottomed in the fourth quarter of 1995 at 2.2% and the stock market rallied strongly over the next several years following rate cuts that started in July 1995. Productivity increases caused by technology investment were key. “From 1995 to 2000, labor productivity grew at an annual rate of 2.5% -- nearly twice the 1972-1995 rate of 1.4%.” McKinsey Global Institute, “US Productivity Growth 1995-2000”. Investment in technology and AI could serve to replicate the productivity gains found in the 1990s that helped the US avert a recession from rising rates.

Modest Economic Growth

The advanced reports for our Gross Domestic Product (GDP) in the fourth quarter showed growth of 3.3%, down from the prior quarter at 4.9%. Trahan Macro Research has done a good job identifying the GDP rates at the start of previous Fed rate plateaus. According to Trahan, GDP was 2.9% at the last hike, 3.1% at the end of 2018, 3.4% in 2006, 4.2% in 2001, 4.1% in 1995, and 3.8% at the last hike of 1989. So economic growth is not unheard-of at the peak of the last hike from the Fed. Of the rate hike cycles previously mentioned, only 1995 resulted in a soft landing. The rest resulted in hard landing recessions. It’s possible to speculate that 2019 and 2020 may have resulted in a soft landing if it weren’t for the pandemic shutting down businesses and causing supply shocks.


The Conference Board’s Leading Economic Index (LEIs) shows levels associated with recessions. The year over year percent change is negative and in the ranges of previous recessions such as in 2001, 2007-2009, and 2020. This is one reason for investing cautiously and keeping expectations in check.

The Conference Board’s Senior Manager, Justyna Zabinska-La Monica, has some interesting comments about the latest data. She states, “Despite the overall decline, six out of ten leading indicators made positive contributions to the LEI in December. Nonetheless, these improvements were more than offset by weak conditions in manufacturing, the high interest-rate environment, and low consumer confidence. As the magnitude of monthly declines has lessened, the LEI’s six-month and twelve-month growth rates have turned upward but remain negative, continuing to signal the risk of recession ahead. Overall, we expect GDP growth to turn negative in Q2 and Q3 of 2024 but begin to recover late in the year” – Conference Board “LEI for the U.S. Inched Down in December”. The LEIs will be key to follow in 2024. Can they turn up and ensure a soft landing? That’s a question to be answered in the months ahead.


Employment has been sticky and as I wrote in May of last year, employment represents “the Bull’s Alamo”. As I wrote in May, the National Bureau of Economic Research (NBER) has recorded six recessions since 1980. According to their research, the average initial claims ranged between 376,000 to 554,000 if you remove the 2020 data where claims reached a 4-week average of 2,405,167. For the unemployment rate, the average ranged from 4.8% in 2001 to 9% during the 1981 recession and was 7.5% from February 2020 to April 2020.

Where does the data stand today in comparison? Fed chairman Jay Powell recently stated that the “payroll job gains averaged 165,000 jobs per month, well below a year ago but still strong…although the jobs to workers gap has narrowed, labor demand still exceeds the supply of available workers” (Press Conference 1/31/24). The latest unemployment claims last week showed a slight increase to 214k with weekly continuing claims at 1.833 million. The weekly claims number last week is still well below those seen in a recession and shows no sign yet of a significant trend higher.

Other employment data remains resilient. The Job openings and Labor Turnover Survey (JOLTS) report released last week showed jobs are still plentiful at 9,026,000 in December. The series high for the data was 12 million in March 2022. Looking at hiring the rate was 5.6 million while there were only 5.4M separations due to quits, layoffs, and other separations.

Consumer Confidence

The Consumer Confidence Index rose in January to 114.8 from a revised 108 in December. According to the Conference Board, this is a two-year high because of optimistic current conditions and a decline in pessimism over the future. 45.5% of consumers say jobs are plentiful and only 9.8 said jobs are hard to get. Consumer’s perception of an impending recession has also dropped from 73% in April of last year and currently resides at a low of 66% who say the likelihood of a recession is somewhat or very likely over the next twelve months. The correlation between stock market returns and consumer confidence is quite high so rising consumer confidence has good implications for stocks.

Retail Sales

The latest retail sales figures show that Americans are still spending, despite higher prices. According to Statista, Retail sales including food services grew to $709.9 billion in December, up 0.6% from the previous month and up 6 percent compared to December 2022. Adjusting for inflation, spending is still up 2.2% year-over-year in constant 1982-1984 dollars according to Statista. During the financial crisis of 2007-2009, US retails sales were 14% off their highs. Since the trend continues to remain strong despite inflation, retail sales have not shown any indication of an impending recession.

One of the explanations for why retail has remained strong despite softness in other areas of the economy is because consumers have drawn down their savings. The recent personal consumption expenditures showed an increase of $134 billion while personal income rose only $60 billion. According to Newsweek, the “data suggests that consumers were making up the difference by dipping into their savings, which went down to $767 billion last month from November’s $850 billion…the personal savings rate…fell to 3.7%, the lowest in a year” Mohammed, Omar “Americans Are Spending More, Saving Less”. January 26, 2024. Bank Credit Analyst in their 2024 outlook stated that the “While the US consumer has demonstrated resilience (in 2023), excess US household savings will be exhausted at some point based on their recent trajectory. That supports the view the US economy is on a path to recession so long as monetary policy remains tight” BCA Research “Outlook 2024: The End of The Easy Money Era” December 2023. BCA is correct.


The National Associates of Home Builders (NAHB) states that housing’s combined contribution to GDP generally averages 15-18% from two ways: 1) residential investment (3-5% of GDP) and 2) consumption spending on housing services (12-13% of GDP). The nominal data from NAHB shows that residential fixed investment has slowed in 2023, but remains elevated and has been ticking higher since bottoming in Q1 2023 at $1.06 trillion with the most recent reading at 1.099 trillion. Housing Services have continued to increase as well in 2023 and reached a high in Q4 at $3.36 trillion. Housing Services GDP average per month in 2022 was $3.05 trillion and that average has gone up to $3.28 trillion in 2023.

Recent housing starts data shows a decline of 4% year-over-year. Commentaries from homebuilders and Whirlpool during the Q4 earnings season suggest that gross margins have shrunk due to increased use of incentives. This underscores some of the weakness being felt in the industry due to high mortgage rates. Existing Home Sales in December fell 1% and is down 6.2% from a year earlier. Sales are down as prices continue to increase, albeit at a slower pace than during the pandemic and the era of easy monetary policy. The median existing home price for all housing types increased 4.4% in December from the year prior to $382,600, which is the sixth consecutive month of year-over-year price increases. One of the reasons for the price increases comes as inventory remains low with one million units in inventory in December with homes selling typically after being on the market for 29 days which is short but up from 26 days a year ago. High mortgage rates with consumers locked in at rates well below or near half of current rates is a structural issue related to inventories and better sales figures.

Recent housing data doesn’t show an impending recession around the quarter given resilient residential investment and spending on housing services. Affordability is still terrible for home buyers, but sales are still happening, and the inventory data is not showing a mass exodus by residents due to economic hardship. All roads currently point to soft landing in the economy for housing, despite the headwinds of high prices and high mortgage rates.

Economic Conclusion

While the LEIs are deeply in recession territory, other economic indicators suggest that companies are hoarding labor and the consumer has been able to draw down on savings to afford higher prices. As long as the consumer remains employed and LEIs begin turning up, we stand a good chance of a soft landing. If companies institute large layoff plans in 2024 to protect earnings, this cycle can change. So it is that employment can be highly correlated to rising or falling company earnings. Let’s turn next to our final area to analyze, company earnings.

2024 Earnings Outlook

With 69% of the S&P 500 companies reporting as of January 26th, FactSet shows Year-over-year earnings have contracted based on estimates and results for the financials (down 19%), healthcare (down 21.5%), materials (down 21.6%), and energy (down 31.4%). Earnings growth was primarily found in communication services (up 40.4%), utilities (up 30%), consumer discretion (up 23.2%), and information technology (up 16.9%).

Source: FactSet

We are deep into the 2023 Q4 earnings season by this point with five of the top six of the magnificent 7 reporting last week. When we look at earnings growth over the past quarter, most of it is explained by these six companies. FactSet recently highlighted this in an article last week. Based on estimates for the next quarter, Nvidia, Amazon.com, Meta Platforms, and Alphabet are expected to see year-over-year earnings growth of 79.7% for Q1 2024. When you take out these four companies, the rest of the 496 companies within the S&P 500 are projected to increase earnings by only 0.3%. This isn’t much of a change from the prior quarter. A handful of companies are holding up the S&P 500’s earnings growth.

Source: FactSet

To say that earnings growth is anemic is an understatement when looking at the other 496 companies outside of Amazon, Apple, Alphabet, Meta, Microsoft, and Nvidia. Expectations have been sky-high for the magnificent 7, who seem to be carrying the world of the S&P 500 on their shoulders at this point. Because of their importance, I’ll be concentrating on their recent results and trends.

Big Reports last week

Alphabet recently fell 7.4% on earnings as investors sold on the news after a sizeable increase in the stock price leading up to earnings. Google’s search revenue growth improved, up 12.7% compared to 11% last quarter, while their cloud revenue rose 26% compared to 22% in the previous quarter. The stock has grown 55% year over year primarily on hopes of AI growth and expanding capabilities from Gemini and Bard, Alphabet’s AI tools. As a result of the pull for AI, the company is ramping up investment with little optics into profitability and the CFO noted capital expenditures will be noticeably larger in 2024. Revenue growth has been strong for advertising, up 11% year over year with YouTube a particular standout at 16% growth, up from 11.3 in Q3.

Microsoft posted its fourth consecutive double-digit earnings per share (EPS) beat with revenue upside and the first quarter of results since its Activision Blizzard acquisition. Azure grew 28% with 6% from AI services which halted the decline in the growth trend since the December quarter in 2022 showed growth of 38%. The report bodes well for Amazon’s AWS segment for cloud computing. The stock fell from its all-time highs on the earnings news, down 2.69% Wednesday, but the long-term chart trend is up since the stock bottomed out late 2022.

Nvidia is up slightly last week but fell recently on AMD’s results, which fell 2.4% Wednesday, as the company gave downbeat revenue guidance. Their guidance comes in just under 1% growth year over year for the next quarter, and below expectations. As announced recently, their revenue had improved by 10.2% in Q4 to 6.17 billion. In gaming, revenue grew 17% year-over-year. Embedded revenue fell 24% year- over-year, which are used mainly in automotive and industrial segments. Data Center and Client revenues soared by 38% year over year as the company noted a gain in CPU server share in the quarter. Client sales were up 62%. Guidance going forward from the company stated growth for GPU revenue and in Data Center sales and Client revenues. Gaming revenue will likely decline by double-digit percentage and embedded demand is expected to remain soft through 1H24. AMD is the underdog compared to Nvidia when it comes to AI chip sales share, but it gives somewhat of a window on the industry, especially gaming and how investors might react to earnings come the release date of February 21st.

Earnings Conclusion

FactSet’s recent analysis on January 26 indicates that of the 268 companies in the S&P 500 that have issued EPS guidance for the current fiscal year, 136 have issued negative guidance and 132 have issued positive guidance, almost a coin toss. Also from FactSet, S&P 500 earnings are projected to grow throughout the year at 4.6% growth for Q1, 9.4% growth in Q2, 7.7% growth in Q3, and 21.3% growth in Q4. You can’t have a hard landing in the economy if earnings are growing. Of course, it’s arguable that the primary reason the S&P 500 shows growth is due to a handful of companies.

From a valuation perspective, the forward 12-month price to earnings ratio (P/E) for the S&P 500 is 20. That’s elevated above the 5-year average of 18.9 and the 10-year average of 17.6. Information Technology (at 28.3) and consumer discretionary (at 24.4) have the highest valuation P/Es among the sectors with energy at (11.6) and financials (at 14.9) at the bottom.

Geopolitical Risks

COVID-19 and the war in Ukraine has highlighted the worlds’ dependency on supply chains with supply shocks sending prices soaring. Production remains concentrated in a small number of countries such as India, Vietnam, and China. 90% of global trade is shipped via maritime routes and these routes are in danger of piracy, Houthi attacks, and Iran’s Navy in the Middle East. Geopolitical risks that shake up these supply chains are an increased threat to the world economy.

Middle East

Oil prices have started rising because of concerns over a deeper Middle East conflict with Iran. This despite calls by the Organization of the Petroleum Exporting Countries (OPEC) reporting slower demand in the year ahead. Shipping is being affected by the skirmishes in the Red Sea with CNBC reporting that 90% of traffic headed for the Suez Canal is being rerouted due to Houthi rebel attacks and Iran’s navy applying pressure.

The conflict in the Gaza strip has reignited Israel’s plans to restore their defensive perimeter. While the conflict continues in the south, Israel is beginning to eye its northern border and the threat from Hezbollah. A two-front war is never advisable and could put a strain on resources. If the U.S. stepped in to assist, it would more than likely encourage Iran to assist Hezbollah and spark the possibility of a larger conflict.

According to Reuters, U.S. bases and presence in the Middle East has shrunk from its peak of 160,000 troops in Iraq in 2007 and more than 100,000 troops in Afghanistan in 2011. While currently at about 30,000, there are efforts now to increase U.S. presence because of conflicts increasing and due to the disturbances in the maritime routes.

China’s Economy

Reuters recently reported last week that China’s manufacturing activity contracted for the fourth straight month in January. The report showed the purchasing manager’s index (PMI) rose to 49.2 from 49 in December, but still below the breakeven level of 50. It’s expected to see some contraction in the month ahead as the country celebrates the Lunar New year starting on February 10. Official data shows the country grew 5.2% last year. Home sales are down 34% as policymakers aim to shutdown speculation there. Many analysts fear the drop in China’s manufacturing activity shows there’s an ongoing drag in global demand.

Last week, the People’s Bank of China announced a cut in the reserve requirement ratio starting on February 5th of 50 basis points, the biggest in two years which Reuters expects will add $140 billion of liquidity. The government is also said to be announcing policies to improve commercial loans last week, but I haven’t seen it yet. The Shanghai Composite Index rose last week on the news but has quickly given back those gains last week. The Shanghai index fell 3.7% last year and remains in a downward trend.

Election Year

It’s a presidential election this year, and while not a geopolitical risk, it’s a political one! First Trust has produced a report that shows the average return for the S&P 500 during a presidential election year is a gain of 11.28% since 1928 – with 19 of the 23 years providing positive performance. Those are good odds! They also note that the performance gain was very similar when a Democrat or a Republican replaced a Democrat in office with a difference of only 1.9% in the average gain. All-in-all, the data suggests you shouldn’t base your investment decision on who’s going to be elected.

Geopolitical Risk Conclusion

Geopolitical risks remain elevated and have increased over the last few years. Trade wars with China, Russia vs Ukraine, skirmishes in the Red Sea and Middle East, and the question of whether China can smoothly transition from one based on government investment and trade to a consumer-driven economy. China’s intention to absorb Taiwan voluntarily or by force stands to provide plenty for investors to be concerned over. But one concern that shouldn’t be on our minds is the election. While the country is deeply divided on many topics, the stock market typically performs well regardless of who gets elected based on historic returns from 1928 to today.


If you look at monetary policy, modest economic growth, positive earnings outlook, and manageable geopolitical and political risks, the probability of a soft landing is high. Underneath the surface of the S&P 500’s earnings, there’s still enough left to be concerned about with the majority of growth stemming from a small handful of companies; however, profitability hasn’t fallen off the deep end. There’s no sign in the macro data that companies are scrambling to let go of employees. Just the opposite, they continue to be hesitant to lose talent. Unemployment claims and the gap between hiring and separation due to layoffs and quits also appears manageable. The consumer has shown resilience in the face of inflation and stands to benefit from continued disinflation, though much of that has come from consistent consumption while prices have risen driven by a reduction in the savings rate. Sitting here in January with the data presented in this report, the likelihood of a soft landing looks probable. As investors, we should continue to stick with our benchmark allocations. If you are stock picking, pay close attention to the earnings season and your company’s plans to increase profitability, sell to new markets, and sell new products.


Investing involves risk, including the loss of principal. Past performance is not indicative of future results.

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