Weekly Market Update: February 5, 2024
Inflation, though still elevated, remains on a downward trajectory. This was evident in the December Personal Consumption Expenditures (PCE) Price Index, which is the assessment of inflation most closely monitored by the Federal Reserve. The PCE and core PCE Price Indexes, the latter of which excludes the food and energy components, increased 2.6% and 2.9% on a 12-month basis, respectively. The core PCE figure was down from 3.2% in November, and the lowest reading since March of 2021.
The Federal Reserve has been able to make a notable dent in the pace of price growth without pushing the economy into recession. In fact, the gross domestic product (GDP) advanced by a better-than-expected annualized rate of 3.3% during the fourth quarter of 2023. This, along with solid labor market conditions, including swelling of job openings, and continued growth in retail sales, has staved off much concern about impending U.S. recession, despite the Fed’s restrictive monetary policies.
Federal Reserve officials have some important monetary policy decisions looming. (Note that the Federal Open Market Committee (FOMC) was scheduled to meet shortly after we went to press.) The key question will be when to pivot on the interest-rate front and begin reducing rates. Wall Street has been forecasting six quarter-point cuts to the federal funds rate in 2024, but we think fewer reductions are likely in light of the GDP figures and steady labor market. The economy has outperformed prognostications over the last 12 months, and even though the December personal income and spending report showed that consumers are now dipping into their savings accounts to pay for their expenditures, U.S. consumer confidence increased in January to the highest level since the end of 2021.
Meantime, fourth-quarter earnings have been mixed so far. With stock valuations elevated entering the season, Wall Street has cheered those companies that have exceeded expectations (e.g., IBM) and punished those that failed to meet forecasts (e.g., Tesla). This trend is likely to persist throughout this year.
Conclusion: In the current environment, we think the market will continue to reward those companies that deliver strong profit growth. Thus, a portfolio consisting of high-quality companies that have a history of delivering consistent earnings results is a good way to invest in this equity market.