Weekly Market Update: January 29, 2024

The consumer sector remains the linchpin in the continued expansion of the U.S. economy. This is not surprising, given the sustained strength of the labor market. According to the Labor Department, nonfarm payrolls climbed by an estimated 2.7 million in 2023, and the unemployment rate ended the year at 3.7%, near a historic low. This has not changed so far in 2024, as initial jobless claims in mid-January totaled 187,000, the lowest level since September. The tight labor market, which saw average hourly wages rise 4.1% in December, a rate above price growth at both the consumer and producer levels, has increased the purchasing power of the consumer. On point, December retail sales increased 0.6%, double the consensus forecast.

A “soft landing” for the U.S. economy remains plausible. (Note that the first reading on the fourth-quarter gross domestic product (GDP) was due shortly after we went to press.) The expectation was that GDP expanded at an annualized rate of 2.5% during the final three months of last year. A recession, which Wall Street was expecting following the Federal Reserve’s mostrestrictivemonetarypolicycoursein four decades, has yet to materialize.

This economic backdrop does not put pressure on the Fed to begin cutting rates, especially with inflation still running above target. However, in a Presidential election year, all bets may be off, and Wall Street is still predicting an interest-rate reduction at the May Federal Open Market Committee (FOMC) meeting. Our stance is that the Fed will pivot in the second half of this year and that we may see three quarter-point reductions in 2024. That said, any added stress in the bank or commercial real estate sectors could cause the lead bank to act sooner or more forcefully.

Meantime, Wall Street is keeping an eye on fourth-quarter earnings season, which got off to a decent start. However, the consensus is still calling for a low-single-digit profit decline for the S&P 500 Index. This is not an ideal scenario, especially with many stocks trading at elevated price-to-earnings multiples.

Conclusion: The S&P 500 Volatility Index recently traded at a level suggesting that the stock market is overbought. Thus, we think a portfolio consisting of mostly high-quality stocks is the best near-term investment strategy.

Source: ValueLine.com