Weekly Market Update: January 9, 2024
The Federal Reserve had to be pleased with the progress it made on the inflation front in 2023. True, the year ended with price growth still running above the central bank’s target of 2.0%. However, consumer and producer (wholesale) prices remain on downward trajectories, and the Personal Consumption Expenditures (PCE) Price Index showed that inflation rose less than expected in November. It also is worth noting that a significant dent was made in the second half of the year, with the core PCE (excluding food and energy) up at a rate of 1.9% over the final six months.
The U.S. economy held up well despite the increasingly restrictive monetary policies in place. For the majority of last year, the federal funds rate was above 5.00%. The higher rate environment put pressure on certain parts of the economy, including manufacturing and housing, but the continued strength of the job market powered the U.S. consumer. The consumer sector was responsible for the lion’s share of last year’s growth that peaked in the third quarter with an annualized gross domestic product (GDP) increase of 4.9%.
The Fed’s ability to slow price growth without hurting the overall economy was a “goldilocks” scenario for Wall Street. A nine-week buying spree to end 2023, fueled by a sharp drop in Treasury market yields and the likelihood that the central bank will pivot on the interest-rate front in 2024, helped produce respective 12-month gains of 13.7%, 24.0%, and 43.4% for the Dow 30, the S&P 500 Index, and the NASDAQ Composite.
Wall Street’s attention will soon turn to fourth-quarter earnings season. That series of corporate news commences on January 12th when several big banks, led by JPMorgan Chase, release their latest financial results. Our sense is that earnings growth for S&P 500 companies, which is estimated to be in the low-single-digit range, will be needed to continue justifying the premiums paid for stocks.
Conclusion: With the price-to-earnings ratio for the S&P 500 Index, based on forward-looking earnings, ending 2023 above 20x, we think companies that disappoint with their results and/or guidance will be vulnerable to selective profit taking.