What if the Economy Has a No-Landing Outcome?

Things sure look good for the U.S. economy, with a strong gain for gross domestic product, a deceleration in inflation, a rise in real (inflation-adjusted) paychecks, low unemployment and a Federal Reserve apparently sold on cutting interest rates. No surprise that the stock market has responded with glee: The S&P 500 has catapulted 22% over the past 12 months. To think that one year ago, 61% of economists in a Wall Street Journal survey expected a recession soon, aka a “hard landing.”

Conventional wisdom today anticipates a “soft landing,” with solid but temperate economic expansion, little inflation and lowered borrowing costs. But as market seer Robert Farrell, the former research chief at Merrill Lynch, once observed: “When all the experts and forecasts agree, something else is going to happen.”

What if what happens lies in between soft and hard, in the realm called “no landing”? In this outcome, inflation fails to keep dropping toward the Fed’s desire 2% annual rate and might even re-accelerate. Economic expansion is robust, but the central bank scraps its plans to loosen policy, scotching expectations for lower rates. Then the disappointed stock market likely would flag.

That is the outcome laid out by Ned Davis Research in a note: “The no-landing scenario has historically meant positive, but below average, stock returns and a hawkish Fed,” wrote Alejandra Grindal, chief economist, and London Stockton, a research analyst, at the analytics firm.

While conceding that the soft-landing result is the more likely, the pair made the case that recent data points could indicate the “meh” alternative. For one thing, the economy is at “above-trend growth,” and “higher inflation this year is more than just a remote possibility.” So GDP could run too hot to allow inflation to continue its descent, and the Fed could back off from rate cuts.

Indeed, GDP grew at a blistering 3.3% annually in 2023’s final quarter. For 2023, the Ned Davis report pointed out, shelter costs “remained stubbornly high,” and super-core CPI “remained resilient”—that is, costs not counting energy and rents.

Such developments could lay the groundwork for dismay in the stock market, per Grindal and Stockton. They wrote that “the no-landing scenario, which we would describe as an overheated economy, is historically consistent with positive, but below-average, equity returns.”