Ian Toner
Despite a surprisingly resilient economy, a recession is still likely to occur halfway through 2024, said Ian Toner, chief investment officer at investment consultant Verus.
Toner spoke to Pensions & Investments on Nov. 2, the day after Federal Reserve officials held interest rates steady for the second meeting in a row as the central bank aims to quell inflation without overcooling the economy.
The Federal Open Market Committee left the federal funds rate unchanged at a range of 5.25% to 5.5% following its two-day meeting.
Toner said Verus has been in the "higher-for-longer" camp for some time even though many thought the Fed would start to bring interest rates down as a recession was expected to develop by the end of 2023.
However, despite signs of weakness in the economy that many expected as a result of rising rates, there also have been unexpected signs of continuing strength. A fall in interest rates resulting from an economic slowdown, for now, is likely not coming anytime soon, Toner said.
"Everyone had their rose-colored spectacles on and we were saying, 'OK, probably interest rates, we can see them coming down by year-end but it's going to be higher, it's going to be longer,'" said Toner. "And we're now actually stretching that out. We might not see rates really come down until, you know, sometime materially into next year, because of that slightly unexpected strength."
One recent example of that unexpected strength was the U.S. gross domestic product increasing by an annual rate of 4.9% during the third quarter.
"There's a bunch of more positive stuff that's been going on in the economy than then you might expect," Toner said. "So you've got, you know, this strong economic growth, the strong consumer behavior, you've got good unemployment numbers, you know, a whole variety of those positive things."
"But at the same time, there's reasons for believing that there's underlying disruption, that rise in interest rates, the yield curve, the real estate market – and particularly commercial real estate market," said Toner.
He also noted that while the regional bank crisis that resulted in the failure of Silicon Valley Bank has not become the type of contagion that resulted in the Great Recession 15 years ago, "the math of that didn't really go away."
"The math of that still is sort of there in a bunch of places. And those guys own a lot of commercial real estate in places where that commercial real estate is potentially not trading necessarily at where it should be trading," said Toner.
At the beginning of the year, Toner said that Verus' outlook saw some kind of a landing before the end of 2023, although he said as a firm they're inherently skeptical about the concept of a "soft" landing.
"Soft landings are usually what people talk about in the press for months before a hard landing happens," he said.
However, the continuing strength of the economy means the expectation of when that landing is going to occur has been pushed back.
"It's been a little more positive than we expected," said Toner. "We were expecting maybe a recession toward the end of this year, early next year. That's probably bumping out to the end of the end of the first half of next year."
"We can (still) see good justification for putting protective stuff in portfolios for if and when that happens, like trigger funds for credit, you know, when credit blows out," Toner said. He also noted that opportunistic real estate has great potential.
