The US economy is showing concerning signs that a recession could be on the horizon for 2024, sparking fears among investors that the stock market is dangerously overvalued and could plunge up to 40%. This dire warning comes from veteran market strategist Paul Dietrich, chief investment officer at financial services firm B.Riley Wealth Management.
In an exclusive interview, Dietrich points to the current stock market rally being largely driven by optimism around the Fed cutting interest rates and ongoing enthusiasm for AI and tech stocks. However, he believes underlying economic indicators tell a worrying story of slowing growth, high inflation that won’t retreat quickly, and consumers struggling with mounting debt burdens.
“The unemployment rate remains near historic lows, but workers without jobs are having trouble getting rehired. And credit card debt recently hit a record $1.13 trillion showing consumers can’t keep pace with inflation and rising rates,” Dietrich revealed. “Once pandemic stimulus money works through the system in the next two years, inflation could cause 1970s-style stagflation.”
Even a Mild Downturn Could Spark 40% Correction
Despite resilient GDP growth estimates lately, Dietrich sees the US entering a mild recession in 2024. However, he warns that even modest recessions carry risks of steep stock market declines – especially when valuations are sky-high like today.
“Stocks on average fall 36% around recessions, but current overvaluation is the worst we’ve seen since the 2001 dot-com bubble. Back then, the Nasdaq plunged 78% while the S&P 500 lost 49% peak-to-trough,” he reminded. “Today’s mania in unprofitable tech names focused on AI could see similar massive corrections if the economy rolls over.”
Dietrich believes the S&P 500 sinking 40% from current levels, down towards the 3000 point region, is entirely feasible in the event of recession – even if it proves comparatively mild compared to past downturns. This would wipe out several years worth of stock gains.
Economic Red Flags Emerging
So what signals is Dietrich tracking that indicate the US may be headed for recession in 2024? Here are some of the red flags he highlights:
- Jobs market weakness with elevated continuing jobless claims
- Consumers maxing out credit cards and spending power Slowing retail sales
- Pandemic stimulus still feeding through to keep inflation hot
- Manufacturing indexes declining
- Housing market rapidly cooling with prices now falling
The veteran strategist also notes that while inflation appears to be cooling since mid-2022 peaks, expectations for a quick return to the Fed’s 2% target are unrealistic. The unprecedented stimulus pumped in to the economy during the pandemic hangover will continue exerting upward pressures on prices for some time.
“It likely takes around two years for inflation to fully reflect monetary stimulus – which means the last stretch back to 2% will be very difficult,” Dietrich commented. “We can’t rule out stagflation where growth stalls but inflation remains stubbornly high.”
Protect Your Portfolio Now
With risks of a 2024 recession rising, investors still enjoying the market’s melt-up need to get defensive according to Dietrich. His recommendations for protecting your portfolio include:
- Take profits on overvalued tech/AI stocks with shaky fundamentals
- Move more cash into inflation-hedging hard assets like commodities and real estate
- Buy defensive stocks less tied to economic growth – utilities, healthcare, consumer staples
- Maintain robust allocation to Treasuries as yields spike during downturns
- Consider buying put options to profit from further market declines
While timing precisely when markets will roll over is notoriously difficult, Dietrich emphasizes recession risks are clearly building under the surface. Savvy investors need to review exposure to economically-sensitive parts of the market and ensure adequate safety nets are in place before any significant correction gains momentum. Because if economic tremors translate into a full-blown recession, stock losses could quickly cascade out of control.
