Weekly Market Update: January 2, 2024
The U.S. inflation situation continues to improve. This was evident in the November Personal Income and Outlays report from the Bureau of Economic Analysis. Specifically, the Personal Consumption Expenditures (PCE) Price Index, which is the assessment of inflation most closely monitored by the Federal Reserve, fell 0.1% on a month-to-month basis, the first decline since April 2020. The core PCE Price Index, which excludes the food and energy components, rose 0.1%, which also was lower than expectations. Even more importantly, the PCE and core PCE Price Indexes rose a smaller-than-expected 2.6% and 3.2%, respectively, on a 12-month basis. Both were the weakest advances since the first half of 2021.
Treasury market yields have moved notably lower. This was a reaction to the continued moderation in price growth and broad expectation that the Federal Reserve is done raising rates. And, although senior Federal Reserve officials continue to say that the benchmark short-term interest rate needs to stay high for an extended period to effectively fight inflation, Wall Street thinks the data-driven central bank will pivot in 2024 and begin cutting rates later this year. However, it should be noted that many market pundits predicted rate cuts in 2023 that never came to fruition.
The case for a “soft landing” for the U.S. economy is still plausible. While growth in the gross domestic product (GDP) is forecast to slow considerably from the third quarter’s annualized pace of 4.9%, recent data suggest the consumer, supported by the unprecedented government spending of recent years, and growth in real wages, is still on solid footing. These reports included strong November job creation, positive retail sales growth, above-forecast personal income, and the biggest jump in durable goods orders in more than three years. This “goldilocks” scenario of moderating inflation in a still expanding economy emboldened equity investors. The Dow Jones Industrials, the technology heavy NASDAQ Composite, and broader S&P 500 Index all finished 2023 with sizable gains.
Conclusion: The age-old adage “don’t fight the Fed” is clearly powering equities higher. However, this buying has pushed market valuations to elevated levels that leave stocks vulnerable to some profit taking on any disappointing news.