January 15, 2024

“An investment in knowledge pays the best interest.”

Benjamin Franklin.

Today we honor Dr. Martin Luther King, I would like to quote my favorite message, a message that many have forgotten or overlooked in this heated political environment.

“I have a dream that my four little children will one day live in a nation where they will not be judged by the color of their skin, but by the content of their character.”

— “I Have A Dream” speech, August 28, 1963 “

As we enter this political season, starting today with the Iowa Caucus. I hope we take that to heart.

Last week, inflation was on everyone’s mind, but first here are the numbers. The S&P 500 rose 1.7%, The Dow Jones Industrial Average added .71%, The Nasdaq plowed ahead 2.8%. Internationally, the FTSE 100 was down .84% and the MSCI-EAFE gained 1.2%. The inverted yield curve drew closer with the 2-year Treasury yield finished at 4.146% and the 10-Year paid 3.939%.

As Market Watch’s Jeffry Bartash reported, CPI posts biggest increase in three months, but little sign of rising inflation. Consumer prices rose somewhat faster at the end of 2023 and interrupted a slowdown in inflation, but the recent evidence still points to a further deceleration in the months ahead. The consumer price index rose 0.3% in December to mark the biggest gain in three months. The rate of inflation over the past year also moved up to 3.4% from 3.1% in the prior month. The core rate of inflation, seen as a better predictor of future price trends, also rose 0.3% in December. Economists polled by The Wall Street Journal had forecast a 0.3% increase. The annual rate of core inflation ticked down to 3.9% from 4% in the prior month. That is the first time the rate has dropped below 4% since the middle of 2021. While the latest CPI report was a bit hotter, it is unlikely to change any minds at the Federal Reserve. Fed officials see the rate of inflation slowing to less than 2.5% in 2024 and expect to their 2% target by 2025. However, several at the Federal reserve have been commenting that a decrease in interest rates at the march meeting may be premature. New York Federal Reserve President John Williams said U.S. interest rates will likely need to stay high “for some time” until senior central bank officials are confident the rate of inflation is returning to 2%. The report probably will not encourage the Fed to finalize plans to start cutting rates, either.

As 2024 progresses, the Federal Reserve seems to have successfully cooled inflation and avoided the much-predicted recession. Economists are now split on if a recession will occur, but I will remind you all that the leading economic indicators have yet to reverse course and inflations little uptick still does not relieve the prices all Americans are paying at the grocery store or the pump.

Some good economic news…. Initial jobless benefit claims inched lower by 1,000 to 202,000 in the week ended Jan. 6, the Labor Department said last Thursday, the lowest level since mid-October. Economists polled by the Wall Street Journal had estimated new claims would rise to 210,000. The labor market remains healthy. That keeps consumers spending and supports economic growth, albeit at a slower pace than last fall. Newsmax reported, the major banks seem comfortable with consumer spending as last week all the large U.S. banks reported mixed results Friday, dented by exceptional costs connected to job cuts and to replenishing a federal fund tapped during last year’s crisis involving midsized lenders. But while consumer credit quality has diminished somewhat, executives continued to describe relatively resilient U.S. economic conditions. “The consumer credit narrative broadly is that the consumer is fine,” said JPMorgan Chase Chief Financial Officer Jeremy Barnum, who characterized an uptick in charge offs for bad loans as reflecting a “normalization” of the credit market, rather than a “deterioration.” Chief Executive Jamie Dimon said the U.S. economy “continued to be resilient,” while noting in an earnings press release that the bank remains “cautious” in light of wars in Ukraine and Gaza, and the risk that inflation will turn out to be “stickier” than expected.

Some other good news…A boost to the child tax credit and a trio of business tax cuts could be within reach as congressional negotiators are reportedly nearing a deal worth between $70 billion to $80 billion. Congressional leaders are hoping to announce a framework Thursday, reported Punchbowl News, though there are still roadblocks to announcing a deal, including Senate Democrats’ wishes for a low-income housing tax credit to be included. The deal would increase the maximum value of the child tax credit to $2,100 from $2,000 by 2025, and allow families to take the full credit as a cash payment if they have no tax liability, according to a report in Semafor. The business provisions involve an extension of rules allowing companies to immediately deduct capital expenses; a larger interest deduction; and restoring businesses’ ability to immediately write off research and development expenses, according to the same report.

Markets are still pricing in a year-end federal-funds rate of 3.75% to 4%, versus the current 5.25% to 5.5%. There’s a lot more inflation, employment, and other economic data to come before then. As such our position of locking in intermediate term rates, continued rotation to value stocks and caution in what could be a volatile first half of the year as to political games heat up into the coming election.

Happy MLK day.

Mike