Will A Market Correction Trigger A Recession? | Cameron Dawson

**Cameron Dawson** (0:00)
We do think the biggest risk, one of the biggest risks to the US economy is actually a falling stock market. So because allocations to equities are at all times highs, exposure to equities and households are at all time highs, we think that households are more sensitive to equity prices than they have been in prior cycles, which suggests that if you were to see the equity market sell off for any host of reasons, that it could actually cause the high-income consumer, which makes up the largest portion of spending in the US to pull back, and thus you get a feedback loop mechanism where high-income consumers pull back, consumer spending falls, you have higher unemployment, causes the equity market to fall further, et cetera. Like you get this negative feedback loop. That would be the bare case for 2025

**Adam Taggart** (0:52)
Welcome to Thoughtful Money. I'm its founder and your host, Adam Taggart. When today's guest was last on this program back in October, she advised investors to prepare for a more volatile year ahead in 2025, a year in which she predicted that, the game would start to get harder. So far, with the major indices stuck bouncing up and down in a trading range, her prediction is looking pretty prescient. So now that we're two months into the new year, and we've got more clarity around the new Trump administration and its policies, what does she see ahead for the markets? To find out, we're fortunate to welcome Cameron Dawson, Chief Investment Officer at NewEdge Wealth, back to the program today. Cameron, thanks so much for joining us today.

**Cameron Dawson** (1:33)
Thank you for having me. Happy to be here.

**Adam Taggart** (1:36)
Such a pleasure. Thank you. And I do want to let folks know, your dance card has been very busy today, Cameron, and you rushed here from another media appearance. I very much appreciate you making the time to do this for us today. All right, Cameron, well, look, as I said in the intro there, there's a lot that's new since the last time we talked, and certainly new administration, a whole bunch of new policies. And your prediction of volatility seems to be, that's the word coming out of a lot of people's mouths here at the start of the year. So lots to go through with you. Before we get to the specifics, though, if I can just ask you the general question, I'd like to kick these interviews off with, what's your current assessment of the global economy and financial markets?

**Cameron Dawson** (2:16)
So we think that the global economy does remain resilient. We're not making a recession call for 2025 from the US perspective. We haven't made a recession call in the last two years. We continue to see signs that the labor market remains structurally tight, that there are signs that you're still in somewhat of a capex cycle within the US, which all suggests that real GDP growth remains positive in 2025 Now, one of the things that we've been talking about in our outlook for this year, which we titled Great Expectations, and there's a lot to unpack with that idea of Great Expectations. But one of the key assertions that we had is that if you look at 23 and 24, there were a lot of unique things that drove the US economy to be much stronger than expected. You went into 2023 with analysts expecting to have a recession. There was an expected 0.5 percent growth for that year. You ended much closer to 3 percent growth in 23 and 24
One of the things that we have been noting is that you had some pretty unique thrivers that kept the economy afloat. If you think of things like the influx of low-cost labor because of a huge surge in immigration, not all illegal immigration, certainly, immigration that was a catch-up from the pandemic time. You also had related to that a big surge in productivity. So effectively, profits being able to grow, growth in the economy coming without you having to add a lot of cost to it, add a lot of labor, and that allowed for this expansion of margins and this really beneficial cycle from a productivity perspective. You also had really ample liquidity from the Treasury. So despite the fact that the Fed had raised rates, despite the fact that the Fed was doing QT, there was some dynamics where we saw overall market liquidity remain rather abundant because of some of the actions that Treasury was doing, whether it was funding short through bills, as well as the drawdown of the reverse repo facility. So there were some interesting liquidity dynamics that certainly were a boost for markets. And the last part of it is that you had this overall resilience to interest rates. For the first time ever, you saw net interest expense fall as the Fed was raising rates using the Bureau of Economic Analysis data, the BEA data, which is wild to think that as the Fed is raising rates, you're actually seeing net interest expense. So the interest you are earning on your, you're paying on your debt minus the interest you are earning on your cash, actually dropped in 23 and 24, which created this interesting dynamic where we were looking around saying that higher rates for some people are actually rather stimulative. And so our notion for 25 is that a lot of those tailwinds are remaining or at least not turning into headwinds, but they're much less strong than they were in 23 and 24 We already know we're getting a crackdown on immigration. We already know that from a liquidity perspective with Treasury, that some of those really beneficial dynamics are starting to fade. We could talk about how the new Treasury Secretary kind of has his back against the wall in some of that Treasury funding. We know from a productivity perspective, that's kind of a big wild card for this year. How much productivity do we get from technology versus just that structural snapback that you typically see? It's good to remember, high productivity periods usually follow low productivity periods. So how much of that snapback do we get? And then the last portion, which I think is important, is that some of those dynamics around interest rates being beneficial are starting to fade. So if we think about it in terms of second derivatives, you've gone from that net interest expense falling at a maximum of 30 percent on any of your basis in the data to being down to 13 percent. So you're starting to lose a little bit of that very peculiar interest rate dynamic. So all of that to be said in a very long-winded way to answer your very short and succinct question, which is that we think that real GDP growth does slow in 2025, but it doesn't fall off a cliff. And then you have to ask a question, or you could ask a question of, what's the outlook for inflation to get to nominal GDP growth, which of course nominal growth is what really matters for things like equities and credit. And that then is how you can derive an outlook for what we think those risk assets can do on down the line.