Weekly Market Update: January 22, 2024
The final 2023 readings on consumer and producer prices painted a mixed picture on the state of inflation. True, the reports did not change the narrative that inflation is on a gradual downward trajectory, but getting to the Federal Reserve’s target growth rate of 2% will not be easy. On point, JPMorgan Chase’s Jamie Dimon, head of the nation’s largest bank, recently noted that inflation remains sticky and interest rates may need to be higher than markets expect.
Stubbornly high inflation was seen at the consumer level. The December Consumer Price Index (CPI) rose 0.3% on a month-to-month basis and was up 3.4% over the last 12 months, both higher than expected. Conversely, the Producer Price Index (PPI) fell 0.1% and was up just 1.0% over the last year. Given this varied data, the Personal Consumption Expenditures (PCE) Price Index, the assessment of inflation most closely tracked by the central bank, will be a key data point ahead of the next Federal Open Market Committee (FOMC) meeting.
The Federal Reserve may not be in a rush to reverse monetary policy course. Indeed, despite forecasts on Wall Street for an interest-rate cut as early as this March, several senior Fed officials have stated that the federal funds rate may need to stay high for longer to effectively fight inflation. Our stance is that a reduction to the benchmark interest rate will not come before the second half of this year.
The Fed’s actions will likely be dictated by the state of the economy. The current consensus is that a “soft landing” is still plausible, especially given the tight labor market. That said, there have been some signs of economic strain, including a decline in December manufacturing activity and sharp downward revisions to prior-month estimated job gains.
Fourth-quarter earnings season got off to a decent start, with a number of the big banks delivering solid profit growth. Solid results from Corporate America may be needed to justify elevated stock valuations.
Conclusion: In an environment where rates remain elevated and fourth-quarter corporate earnings growth is not likely to be as formidable as the prior period, we think a portfolio consisting of high-quality stocks is a prudent investment strategy.