January 29, 2024

“Far more money has been lost by investors trying to anticipate corrections, than lost in the corrections themselves.”

Peter Lynch

With that said, here are the numbers from last week: The S&P 500 rose .77%, the Dow Jones Industrial Average added .50%, the Nasdaq was up .40%. Internationally, in the UK, the FTSE 100 had a big week up 1.98% and the MSCI-EAFE gained .08%. The 2-year Treasury closed Friday with a yield of 4.341% and the 10-year was 4.11%

So, as we close the first month of 2024, the market seems to be cautiously moving ahead. However, my omnipresent Leading Economic Indicators still refuses to move into positive territory, meaning we are still looking at some fireworks ahead. Inflation may stage a comeback, (as if the effects have gone away), the concern for traders is the market may be in a bear trap, meaning bad news could quickly reverse the good momentum the market is enjoying. This quarter, the bulls and bears will fight it out with valuations and digesting the earnings reports for bellwether companies.

Over the next five sessions, investors will get earnings from about 23% of the S&P 500 SPX, though in terms of market weighting it’s much more, with Microsoft (MSFT), Apple (AAPL), Amazon.com (AMZN), Alphabet (GOOGL) and Meta Platforms (META) as a group accounting for nearly 24% of the benchmark’s total valuation.

Don’t forget there will also be the matter of a Federal Reserve policy decision on Wednesday. No change in rates is expected, but traders will be highly sensitive to guidance on the chances of falling borrowing costs in coming months. The Treasury quarterly refunding announcement could also move bond yields. More drivers of the market will be the slew of jobs data over the week, culminating Friday with the January nonfarm payrolls report. Meanwhile, geopolitical tensions are increasing.

Significantly, inflation is not over. We all see that in our everyday lives. As Ron Surz, president of Target Date Solutions professes, Inflation has plummeted from its 9% high in June 2022 to 3%. It was transitory, lasting just three years. This decrease would have occurred without Federal Reserve actions because supply-chain disruptions caused by COVID were destined to get resolved as shipping containers were unloaded. This form of inflation is called “demand-pull.” It is caused by demand for goods and services exceeding supply. Despite inflation, or perhaps because of it, the U.S. stock market soared in 2023, inflating the bubble beyond credibility. It could be that investors see stocks as an inflation hedge. Time will tell. The other form of inflation, called “cost-push,” is not transitory. It is classic inflation caused by too many dollars chasing too few goods. It happens when a government prints too much money, as has happened globally over the past decade. The impact on the middle class continues to weigh on consumers ability to feed this economy.

Some good news you ask (or at least the media putting lipstick on a pig), Market Watch reports the rate of U.S. inflation based on the Federal Reserve’s preferred PCE gauge rose a mild 0.2% in December and pointed to smaller price increases in 2024.

Inflation picked up at bit at year end after declining in November, but there’s little evidence of emerging trouble. The increase in prices in the 12 months ended in December was unchanged at 2.6%. The core rate of PCE inflation, which the Fed gives even greater weight, also rose 0.2% last month. Economists polled by The Wall Street Journal had forecast a 0.2% increase.

The yearly rate of core inflation slowed to 2.9% from 3.2% to mark the lowest level in almost three years. The core rate strips food and energy costs and is seen as a better predictor of future inflation. Food and especially gas prices can swing wildly from time to time. The Fed is all but certain to cut interest rates this year, but the strong rate of growth could discourage the Fed from acting in the next few months, as had been widely expected.  Market Watch reporter Jeffry Bartash writes, “consumer spending rose a robust 0.7% in December to cap off a strong holiday shopping season and underscoring the remarkable strength of the economy.”

Economists polled by The Wall Street Journal had forecast a 0.5% increase in spending.

Household spending has been buoyed by low unemployment, record low layoffs and the first increase in inflation-adjusted incomes in a few years. Incomes rose 0.3% in December.

Strong consumer spending, the main engine of the economy, helped to deliver a robust 3.3% annual rate of growth in the fourth quarter. The economy also expanded at stunning 4.9% pace in the third quarter.  Americans spent more in December on new cars, drugs, health care and financial services such as stock advice. They also gambled more. Consumer spending was also stronger than previously reported in November. The increase in spending was revised up to 0.4% from 0.2%.

Here is the big issue and one of obvious concern: Economists caution that spending is being driven by upper middle class and wealthy Americans. Families with lower incomes have struggled more with high inflation and the rising cost of housing. The added stress on households is evident in the savings rate. The savings rate fell to 3.7% in December from 4.1%, putting it at the lowest level in a year. Yet, with inflation slowing, gas prices down, and the stock market rising, the outlook for overall consumer spending in 2024 looks pretty good. Consumers are more optimistic, too, recent surveys show. Looking ahead: “The strong gain in spending in December shows that consumer spending entered 2024 with momentum and suggests that consumption growth is on track for another strong gain in the first quarter,” said Michael Pearce, lead U.S. economist at Oxford Economics. “However, stronger spending is being driven partly by falls in the saving rate, which is now at a 12-month low.”

We still are defensive and expect some reemergence of inflation and some slowing of the US economy.

Mike