With December quickly approaching, the festive season is in full swing, and the market's mood is undeniably jolly. However, Deutsche Bank has a different perspective and believes that not even a recession can halt the ongoing party.

Many individuals are optimistic that the United States will avoid a recession and experience a soft landing, despite the Federal Reserve's continuous campaign of interest rate increases. Supporters of this belief point to the resilience of consumer spending, favorable employment data, and moderating inflation as evidence.

Nevertheless, Jim Reid from Deutsche Bank disagrees and argues that the recession is not only on its way but is also overdue.

The year 2022 has been challenging, and few people expected 2023 to be as strong. This led to a search for the elusive recession. Reid points out that it was only in July when the Fed introduced its final rate increase. Considering that monetary policy creates lags that are difficult to measure accurately, a recession before this point would have been historically early compared to previous rate hike cycles.

Historical data supports Reid's argument. Over the past 13 cycles of rate increases since 1950, only one has been followed by a recession within 18 months of the hikes' commencement. However, six have experienced a recession between 19 and 28 months after the initial increase. Given that the current rate increase cycle began in October, we are now in this critical time frame.

Reid highlights indicators of a weakening economy, such as rising credit delinquencies and the most recent jobs report showing the highest unemployment rate since the start of 2022.

Deutsche Bank ultimately predicts that the lagging impact of monetary policy will trigger a mild U.S. recession in the first half of next year, with the nation's gross domestic product projected to slip to just 0.6% for 2024.

Unfortunately, the United States will not be the only country affected. Deutsche Bank forecasts that global growth will reach only 2.4% in 2024, a decline from the expected 3.2% for this year. This downturn will heavily rely on the acceleration of emerging markets.

The Potential Bearish Outlook for the S&P 500 and Gold

Euphoria has been filling the air in recent weeks, but there are still voices expressing reservations about the future. Gavekal Research is raising a warning flag, suggesting that the ratio between the S&P 500 and the price of gold might soon take a bearish turn. Similarly, Stifel believes that the next decade will witness rangebound returns for the index as stock valuations come under pressure from interest rates.

Concerns Over Rising Interest Rates

Deutsche's Reid shares these concerns regarding interest rates. The rapid increase in rates has resulted in decreased liquidity, creating a sense of urgency to find solutions. There is now an impending race against time.

Reid ponders whether lending standards can be loosened, and whether yields can fall quickly enough to prevent a funding accident that could trigger contagion. The risk of non-linearity looms large, as it has the potential to turn a mild downturn into a severe recession. Reid emphasizes the need to address this risk promptly.

Non-Linearity Risk in 2024

The year 2024 predicts a game of non-linearity due to ongoing geopolitical uncertainty and the upcoming 2024 U.S. presidential election. Deutsche estimates that approximately half of the world's population will be eligible to vote in presidential elections next year, amplifying the potential for social unrest. This situation may become a major driver in the second half of the year.

Reid maintains a cautiously optimistic view, despite these concerns. Deutsche forecasts that the S&P 500 will reach 5,100 by the end of next year, representing a 12% increase from its current level on Monday. If the first-half downturn is even milder than expected, there might be an upside risk to this forecast.

A Promising Future Supported by Technological Innovation

Reid is among many who believe that technological innovation will serve as the foundation for the next phase of the rally. This positive outlook on the medium-term future has been long overdue. As the world flirts with the possibility of recession in 2024, it is crucial to remember the potential promised by technological advancements.

Tech has undoubtedly been the star performer in 2023, and we can only hope to see a repeat of its success.