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The story in markets in 2023 was that US growth expectations were first revised down and then revised up after the easing in financial conditions following SVB in March, see the first chart below.
With the significant easing in financial conditions since November, we are beginning to see the same pattern in 2024, see the second chart.
The performance has been different in Japan and Europe, where growth expectations have been steady in Japan and revised significantly lower in Europe.
In other words, the lack of a slowdown in 2023, which surprised the Fed, the consensus, and markets, was only a US story, and we are starting to see the same pattern play out again in 2024.
Source: Bloomberg, Apollo Chief Economist 
Source: Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
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The rally in rates and credit after the Fed pivot has pushed up the share of single-B and BB loans priced above par, see chart below.
Source: Pitchbook LCD, Apollo Chief Economist See important disclaimers at the bottom of the page.
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The ongoing easing of financial conditions continues to point to a reacceleration in growth over the coming months, see chart below.
Source: BEA, Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
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Comparing the P/E ratio of the S&P 500 with the P/E ratio of the rest of the world shows a record difference, see chart below.
In other words, US equities have never been more expensive relative to international equities.
Source: Bloomberg, Apollo Chief Economist (Note: BEst PE ratio using 12-month forward earnings; BEst = Bloomberg estimates) See important disclaimers at the bottom of the page.
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Since the Fed started raising rates in March 2022, the amount of money in money market funds has increased from $4.5 trillion to $6 trillion, see chart below.
With the Fed cutting rates over the coming quarters, we will likely see some of the $6 trillion leave overnight risk-free fixed income and flow into other asset classes such as equities, credit, and duration.
The record-high $6 trillion in money market accounts is likely a tailwind to equities, credit, and rates, and ultimately the economy—in particular hiring, housing, and inflation.
Source: Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
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Foreign-born employment in the US is back at the pre-pandemic trend, and native-born employment is still 6 million jobs below the pre-pandemic trend, see the first two charts below.
In other words, the post-Covid normalization in the labor force participation rate has mainly been driven by immigration.
At the same time, the number of retired individuals has remained on trend, see the third chart.
The bottom line is that even taking into account that about 1 million died from Covid, there are still around 5 million native-born workers missing.
These 5 million missing workers are the reason why the labor market is tight and why wage inflation is likely to remain elevated.
Put differently, there is still plenty of room for job growth.
Source: BLS, Haver Analytics, Apollo Chief Economist 
Source: BLS, Haver Analytics, Apollo Chief Economist 
Source: Kansas City Fed, CPS IPUMS, Haver Analytics, Apollo Chief Economist See important disclaimers at the bottom of the page.
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Looking at job growth since the Fed began to hike raises questions about whether the labor market is undergoing a soft landing or reacceleration, see the first chart below.
The split between the goods sector and the private service sector shows what looks like a soft landing in the goods sector and a reacceleration in the private service sector, see the second and third charts.
The no landing in services is consistent with ongoing strong demand for airlines, hotels, restaurants, concerts, and sporting events.
With the service sector making up 72% of total employment and generally less sensitive to Fed hikes, and with jobless claims still at very low levels, the upside risks to employment over the coming months are significant.
Source: BLS, Haver Analytics, Apollo Chief Economist 
Source: BLS, Haver Analytics, Apollo Chief Economist 
Source: BLS, Haver Analytics, Apollo Chief Economist See important disclaimers at the bottom of the page.
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There is an ongoing debate about how core PCE inflation could come down from 5.5% to 3.2% without a slowdown in the economy, but this debate ignores that the cyclical components of GDP, including housing, have slowed sharply as a result of Fed hikes, and the non-cyclical components have continued to see strong growth in particular with strong post-Covid tailwinds to restaurants, hotels, and airlines.
The cyclical components of GDP are the interest rate-sensitive components such as housing, capex, and durable goods, and these parts of the economy slowed significantly when the Fed started raising rates, see chart below.
Put differently, it is misleading to say that Fed hikes have not had any negative impact on the economy. Fed hikes had a very negative effect on the interest rate-sensitive parts of the economy, most notably housing, and the result was a decline in housing inflation. With housing having a 40% weight in the CPI basket, the result was a decline in headline and core inflation for both CPI and PCE.
So why did the economy not slow down more, and why did Fed hikes not result in a rise in unemployment? There are two reasons.
First, the post-Covid economy saw surprising strength in the non-cyclical components of the economy, such as eating at restaurants, staying at hotels, and flying on airplanes, etc. Consumers wanted to travel, go to concerts and sporting events after Covid, and this has kept consumer spending strong.
Second, financial conditions eased significantly following SVB, and this boosted GDP growth to 4.9% in the third quarter of 2023. Similarly, the rally in the stock market, credit markets, and Treasury markets since October and after the Fed pivot in December have also eased financial conditions significantly, likely boosting the cyclical components of GDP over the coming months.
As the chart below shows, the bottom line is that the non-cyclical components continue to grow steadily because of post-Covid strong demand for consumer services, and the cyclical components are rebounding because of easier financial conditions.
The likely scenario is that the economy will reaccelerate over the coming months, which will put renewed upward pressure on inflation and, hence, bring back a more hawkish Fed.
In short, the Fed is not done fighting inflation, and, as a result, it is too early to argue that this is a soft landing because both the cyclical and non-cyclical components of GDP are likely to be solid over the coming months, see again the chart below.
Source: BEA, Haver Analytics, Apollo Chief Economist. Note: Cyclical components include interest-sensitive components, i.e., durable goods consumption, nonresidential structures, equipment investment, and residential investment. Non-cyclical components include non-durable goods consumption, services consumption, and nonresidential investment in intellectual property products. See important disclaimers at the bottom of the page.
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Some forecasters are currently predicting that 10-year rates will end the year above 5%, others are predicting a level below 3%, and the chart below shows the standard deviation of the 12-month ahead forecast for 10-year Treasury yields for 26 private sector forecasters since 2019.
The rising trend in the standard deviation of forecasts shows a very high level of disagreement among forecasters about what will happen to long-term interest rates in 2024.
This is not surprising because some would argue that a soft landing with Fed cuts and lower inflation would result in lower long-term interest rates.
Others would argue that a soft landing with no recession and the risk of reacceleration will push rates higher.
On a different note, others would argue that the key driver of rates in 2024 will be a higher term premium, driven by the coming massive increase in the supply of Treasuries.
What is most remarkable about the high level of disagreement among forecasters is that the same elevated level of uncertainty is entirely absent in the MOVE Index and the VIX Index.
The bottom line is that we have a busy year ahead of us in markets with extreme disagreement about the forces driving longer-term interest rates.
Source: Bloomberg, Apollo Chief Economist. (Note: We calculated standard deviation of individual analyst’s forecast for 12 months ahead for every month starting January 2019. The list of contributors in our calculation: UBS, Citigroup, HSBC holdings, Wells Fargo & Co, University Of Texas At El Paso, RBC Financial Group, Natixis SA, Naroff Economic Advisors, Mortgage Bankers Association, MacroFin Analytics LLC, Kasikornbank PCL, ING Groep NV, First Trust Advisors LP, Fannie Mae, Desjardins Securities Inc, Dai-ichi Life Research Institute Inc, Commerzbank, Action Economics, ABN Amro, Bank of Montreal, TD securities, Nomura, Barclays, Goldman Sachs, Bank of America, and Hamburg Commercial Bank AG.) See important disclaimers at the bottom of the page.
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The market cap of the Magnificent Seven is now four times the market cap of the entire Russell 2000, see the first chart below.
And the market cap of the Magnificent Seven is the same size as the market cap of the stock markets in the UK, Canada, and Japan combined, see the second chart below.
Microsoft alone is the size of the entire stock market in Canada.
Source: Bloomberg, Apollo Chief Economist 
Source: Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
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