After global equities experienced a sharp sell-off in early August due to a disappointing July jobs report, economists raised the likelihood of the U.S. economy slipping into a recession.
Goldman Sachs economists raised the probability from 15% to 25% that the U.S. economy would enter a recession within the next 12 months. JP Morgan followed suit, raising the odds of a U.S. recession by the end of this year to 35%, an increase of 10% from its earlier projections.
However, on Monday of this week, Goldman Sachs analyst Jan Hatzius reduced his earlier forecast for a U.S. recession over the next 12 months from 25% to 20%, citing improved economic data and a strong corporate earnings season, as quoted on Yahoo Finance.
Positive Economic Data
According to Yahoo Finance, the latest ISM services report showed an increase to 51.4% in July, from 48.8% in the previous month. The ISM report reflected improved business activity, new orders, employment and supplier deliveries.
Retail sales in the United States rose by 1% in July 2024, following a downwardly revised 0.2% drop in June and way better than the forecast of a 0.3% gain, signaling robust online shopping gains.
Per Yahoo Finance, the number of companies discussing recession concerns with investors during conference calls is at its lowest level in three years. Only 28 S&P 500 companies mentioned recession on theirearnings call from Jun 15 to Aug 15, significantly below the five-year average of 83 companies. So, corporate confidence appears to be improving.
However, companies still remain skeptical about the economic conditions. According to Deutsche Bank chief equity strategist Binky Chadha, as quoted on Yahoo Finance, even while businesses are reporting consistent growth, there isn't much upward momentum because of the continuous uncertainty around inflation, interest rates and the election.
Fed’s September Certainty
Economists had previously predicted that growing recession fears would lead the Fed to implement a 50 bps rate cut. However, with the revised interest rate outlook, they now anticipate a more certain 25 bps cut.
With a 100% chance of a rate cut in September 2024, there’s a likelihood of 77.5% that the Fed might lower the rate to 5-5.25% and a 22.5% likelihood of the rates falling to 4.75-5% in September, according to the CME FedWatch Tool.
ETFs to Consider
Below, we highlight ETFs for investors to increase their exposure as recessionary fears fade and interest rate cut expectations rise in 2024.
Consumer Discretionary ETFs
Sectors like consumer discretionary tend to benefit from increased consumer spending. Lowering interest rates will keep borrowing costs down, while fading recession fears are likely to boost consumer spending and spur economic activity.
Consumer Discretionary Select Sector SPDR Fund XLY has gained 2.84% over the past month and 7.1% over the past three months.
Vanguard Consumer Discretionary ETF VCR has gained 3.1% over the past month and 7.32% over the past three months.
Fidelity MSCI Consumer Discretionary Index ETF FDIS has gained 3.1% over the past month and 7.295 over the past three months.
Technology ETFs
As recession fears diminish, growing consumer and corporate confidence make the technology sector, already a bullish area, an increasingly attractive investment. Capital-intensive sectors like technology benefit from the Fed’s dovish stance, with lower rates serving as a source of cheap funding.
The current rally in the sector driven by the AI frenzy, coupled with rate cuts, makes increasing exposure to tech ETFs a smart play.
Vanguard Information Technology ETF VGT has lost 1.45% over the past month but has gained 14.97% over the past three months.
Technology Select Sector SPDR Fund XLK has lost 3.31% over the past month but has gained 11.64% over the past three months.
iShares U.S. Technology ETF IYW has lost 2.83% over the past month but has gained 14.16% over the past three months.
Growth ETFs
Investors can also explore growth ETFs without the constraint of a low beta. Growth funds typically excel during market uptrends, providing exposure to stocks with high growth potential. Growth investing prioritizes capital appreciation over annual income or dividends.
With fading recessionary fears pointing toward improving corporate and consumer confidence, increasing exposure to growth ETFs is a smart strategy.
Vanguard Growth ETF VUG has lost 1.72% over the past month but has gained 11.49% over the past three months.
iShares Russell 1000 Growth ETF IWF has lost 1.72% over the past month but has gained 11.16% over the past three months.
iShares S&P 500 Growth ETF IVW has lost 1.32% over the past month but has gained 12.50% over the past three months.
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Technology Select Sector SPDR ETF (XLK): ETF Research Reports
Consumer Discretionary Select Sector SPDR ETF (XLY): ETF Research Reports
Vanguard Consumer Discretionary ETF (VCR): ETF Research Reports
iShares Russell 1000 Growth ETF (IWF): ETF Research Reports
Fidelity MSCI Consumer Discretionary Index ETF (FDIS): ETF Research Reports
iShares U.S. Technology ETF (IYW): ETF Research Reports
Vanguard Information Technology ETF (VGT): ETF Research Reports
Vanguard Growth ETF (VUG): ETF Research Reports
iShares S&P 500 Growth ETF (IVW): ETF Research Reports
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
