A 'severe recession' may be coming in 2024 as the stock market, job market flash warning signs, strategist says

• The US could be in for a "severe recession" in early 2024, Briley Wealth's Paul Dietrich warned.
• That's due to an array of recessionary signals that are flashing in the economy.

The US could fall into a severe downturn in early 2024 as a handful of recession signals flash throughout the economy, according to Briley Wealth's chief investment strategist Paul Dietrich.

In a note on Friday, Dietrich pointed to monster gains investors have seen in the S&P 500 this year, with the benchmark index notching its best month of the year in November.

That rally has largely been fueled by expectations the Federal Reserve will cut interest rates early next year — but rate cuts likely aren't coming until the economy tips into a downturn, Dietrich warned.

"Investors shouldn't count on the central bank lowering borrowing costs unless the US economy falls into a severe recession — which may happen early next year," Dietrich said. "The Fed typically starts cutting rates when there is a sharply slowing economy and rising unemployment — meaning a recession."

Signs of a recession are starting to build, Dietrich notes. The stock market's 20% rally this year is one such warning, he said, as the S&P 500 has typically posted outsized gains in the months leading up to a downturn. That was the case prior to the 2001, 2008, and 2020 recessions, when stocks rallied sharply before the economy began contracting.

There are other "stock market disconnects" that are making the case the economy will soon roll over into a downturn, he added. Though the S&P 500 is up overall for the year, the S&P 500 equal-weighed index, which is more representative of the average stock, has fallen into "correction territory," Dietrich said.

The labor market is also starting to weaken. Job openings have fallen, while continuing claims for unemployment benefits have steadily been rising.

And though the overall unemployment rate ticked lower in November, continuing unemployment claims briefly rose to 1.93 million last month. That's the highest continuing claims have been since late 2021, and are at what Dietrich describes as "recessionary levels."

"To think that after a 13-year bull market, we will not see a normal cyclical bear market recession, is to believe that the business cycle has been miraculously repealed after 400 years of historic stock market cyclical data. The believe this time will be different. It never is," he said of investors' recession outlook.

Markets have generally warmed up to idea of a soft landing next year, with Wall Street strategists largely expecting another positive year for stocks in 2024. Bank of America and Deutsche Bank predicted the S&P 500 could see a new all-time-high in 2024. The New York Fed, meanwhile, has lowered its 12-month recession prediction to just 51%, down from an over 70% chance earlier this year.