Enthusiasm for everything related to artificial intelligence (AI) drove a global stock market rally last week. Equity markets in the United States, Europe, and Japan hit all-time highs after a leading chipmaker reported better-than-expected earnings and an extraordinary surge in demand for its artificial intelligence-targeted processors, wrote Rita Nazareth of Bloomberg.
Investors took the news “as evidence that the generative AI boom is both real and spreading. [The company’s] spectacular earnings report and forward guidance are spurring investors to buy shares of almost any company with a stake in the AI race—everything from computer and networking hardware providers to cloud computing plays to enterprise application software,” reported Eric J. Savitz of Barron’s.
Investors weren’t the only ones feeling optimistic last week. Economists who participated in a February Bloomberg survey expect the U.S. economy to grow this year and next year, although a significant minority say that a recession is possible in 2025, reported Augusta Saraiva and Kyungjin Yoo of Bloomberg. They cited a source who stated:
“The U.S. economy remains the envy of the world…Both real economic growth and employment growth remain strong while inflation rates and interest rates are falling.”
Chief executive officers (CEOs) are feeling optimistic, too. The Conference Board Measure of CEO Confidence™ survey found that CEOs are feeling much better than they did at the end of last year.
Last week, major U.S. stock indices moved higher, yields on longer maturities of U.S. Treasuries moved lower.
Don’t fight the Fed.
The Federal Reserve (Fed) is the central bank of the United States. A longstanding bit of investment wisdom is: Don’t fight the Fed. It means that investors should align their strategies with the Fed’s monetary policy. Economic growth is influenced by Fed policy, and stock markets tend to reflect the economy, rising when it grows and falling when it contracts. As a result, Kent Thune of The Balance reported, when the Fed is:
The Fed has left rates unchanged since last summer. In January, the Fed indicated that inflation was moving in the right direction, and the economy remained strong. It projected that the federal funds rate would fall to 4.6 percent by year-end, implying three rate cuts of 0.25 percent in 2024.
The market did its own math and came to a different conclusion. It decided inflation would drop steadily, economic growth would falter, and the Fed would cut rates six times in 2024, reported Nicholas Jasinski of Barron’s.
Last week, economic data suggested the Fed has yet to win its fight against inflation, although there was a sign that economic growth might be moderating.
The data caused markets to recalculate. Now, investors “have moved closer to the view of Fed policymakers, most of whom as of December penciled in 50 to 75 basis points of rate cuts by the end of 2024,” reported Howard Schneider and Michael S. Derby of Reuters.
As markets adjusted to the revised outlook, major U.S. stock indices finished lower, and yields on longer maturities of U.S. Treasuries moved higher.
The Guidance Wealth Office will be closed on
Monday, February 19th, in observance of Presidents Day.
China is out of favor with investors.
For decades, China was among the fastest-growing economies in the world. Its real gross domestic product, which is the value of all goods and services it produces, grew by about nine percent a year, on average, from 1978 through 2022, according to The World Bank. However, the pace of economic growth in China slowed over the last decade and dropped sharply during the pandemic.
Many investors expected China to rebound quickly in 2023 after its Zero Covid policy ended, but that hasn’t happened. Instead, “Exports weakened and deflation deepened, but the big letdown was consumer spending, which slumped as young people struggled to find jobs and the long awaited reckoning for the housing market finally arrived,” reported Allen Wan of Bloomberg.
China’s stock market performance reflected its economic malaise. “The market value of China’s and Hong Kong’s shares is down by nearly $7 [trillion] since its peak in 2021. That is a fall of around 35%, even as [the market value] of America’s stocks has risen by 14%, and India’s by 60%,” reported The Economist via X.
In recent months, investors have been pulling money out of China. “Much of that cash is now heading for India, with Wall Street giants…endorsing the South Asian nation as the prime investment destination for the next decade. That momentum is triggering a gold rush…The euphoria has made Indian equities among the most expensive in the world,” reported Srinivasan Sivabalan, Chiranjivi Chakraborty, and Subhadip Sircar of Bloomberg.
The Chinese government has been trying to stimulate growth and reassure investors. In late January, “the People’s Bank of China announced a larger-than-expected cut in banks’ required reserve ratio…But sentiment remains about as downbeat as can be, despite reports that authorities are considering a package to bolster the stock market totaling some two trillion yuan (almost $280 billion). That’s not just among Chinese domestic investors—that negativity is shared around the world,” reported Randall Forsyth of Barron’s.
In contrast, U.S. investors have been bullish. Last week, the Standard & Poor’s 500 Index closed above 5,000 for the first time. The U.S. Treasury bond market remained relatively steady as yields on many maturities of Treasuries finished the week about where they started it.
We’ve been hearing a lot about layoffs.
Last week, the January 2024 Challenger Report found that employers based in the United States cut more than 82,000 jobs in January. That’s a lot. In December 2023, about 35,000 layoffs were announced. The January job cuts were concentrated in a few industries, and the reasons for the cuts included companies restructuring to lower costs and reorienting toward artificial intelligence.
Layoffs often are a sign the economy is losing steam, but that doesn’t appear to have been the case in January since employers added more than 353,000 new jobs during the month, reported the Bureau of Labor Statistics (BLS).
If we subtract the number of layoffs from the number of new jobs (353,000 – 82,000 = 271,000), the total number of jobs created in January was still significantly higher than the 185,000 new jobs economists anticipated.
Overall, the U.S. unemployment rate remained at 3.7 percent, although there were differences by gender and race.
Women (over age 20) 3.2 percent
Men (over age 20) 3.6 percent
Asian 2.9 percent
White 3.4 percent
Hispanic/Latino 5.0 percent
Black 5.3 percent
The BLS reported that wages moved higher in January. Average hourly earnings increased 4.5 percent over the 12 months through January 2024. If inflation continues to slow – it was 3.4 percent in December – that could be good news for consumers. However, the fight against rising prices continues. Katia Dmitrieva of Bloomberg explained:
“The [employment] report clearly shows that demand [for workers] and wage pressures are far from cooling. That is consequential for the Federal Reserve, which has been signaling that the strength in the labor market shows inflationary pressures are still in the system, and that’s something policymakers will keep in mind before pivoting to rate cuts.”
After falling for much of the week, U.S. Treasury yields rose after strong jobs data dashed hopes the Federal Reserve would cut rates sooner rather than later. Stock investors remained confident despite the possibility that rates would remain higher for longer, and major U.S. stock indices finished the week higher.
Even better than expected!
The United States economy is not performing the way anyone thought it would. Instead of tipping into a recession last year, it crushed expectations. Gross domestic product, which is the value of all goods and services produced in the country, expanded 2.5 percent, after inflation, for the year.
U.S. economic growth
1Q 2023: 2.2 percent
2Q 2023: 2.1 percent
3Q 2023: 4.9 percent
4Q 2023: 3.3 percent
It’s interesting to note that the U.S. economy has been outperforming other developed countries’ economies. For example, GDP for the Group of Seven (G7), which includes seven countries plus the European Union, has grown 4.7 percent, in total, since the fourth quarter of 2019 (prior to the pandemic). G7 GDP includes – and got a boost from – U.S. economic growth.
G7 economic growth
(October 2019 through September 2023)
U.S.: 7.4 percent
G7: 4.7 percent
Canada: 3.5 percent
EU: 3.4 percent
Italy: 3.3 percent
Japan: 2.4 percent
UK: 1.8 percent
France: 1.8 percent
Germany: 0.3 percent
Here’s the really good news: Inflation continued to move lower while the economy grew last quarter. Last week, the personal consumption expenditures index reported that core inflation, which excludes food and energy prices, dropped from 3.2 percent to 2.9 percent. Headline inflation was 2.6 percent.
Last week, major U.S. stock indices finished higher. The yield on the benchmark 10-year U.S. Treasury finished the week in the same place it started.
Are you feeling optimistic or pessimistic?
Consumers are a force to be reckoned with – and we’re all consumers. We buy coats and tweezers, electricity and bread, screens and fishing poles. We download apps and games and educational materials. As consumers, we are vital to the American economy. In fact, consumer spending accounts for about two-thirds of the U.S. economy when it’s measured using gross domestic product or GDP.
Many consumers are feeling more optimistic than they have in a while. Last week, the University of Michigan (UM) reported that consumer sentiment is soaring. After a double-digit rise in December 2023, the UM Consumer Sentiment Index rose an additional 13 percent in January 2024. Surveys of Consumers Director Joanne Hsu reported:
“Over the last two months, sentiment has climbed a cumulative 29%, the largest two-month increase since 1991 as a recession ended. For the second straight month, all five index components rose, with a 27% surge in the short-run outlook for business conditions and a 14% gain in current personal finances. Like December, there was a broad consensus of improved sentiment across age, income, education, and geography.”
Investors are feeling pretty good, too. Throughout January, the weekly AAII Investor Sentiment survey found that a higher percentage of investors than usual expected stocks to move higher over the next six months. Last week, though, that percentage dropped lower as uncertainty increased around the depth and timing of possible Federal Reserve rate cuts.
“…the median projection from all Fed officials [is] for three rate cuts in 2024. That is a more conservative outlook than the one shared by investors, who expect six cuts starting in March,” according to a source cited by Jennifer Schonberger of Yahoo! Finance.
Last week, a rally in technology stocks helped the Standard & Poor’s 500 Index close at an all-time high. Yields on many maturities of Treasuries moved higher over the week.
Is inflation retreating?
Last week, we received a lot of information about inflation. Some seemed to support the idea that inflation was sticky, meaning it wasn’t moving lower, while other data suggested inflation was in retreat. Here’s what we learned:
The Federal Reserve (Fed) has been working to bring inflation down since March of 2022. Over that time, it has lifted the federal funds rate from zero to 0.25 percent to 5.25 percent to 5.50 percent, and inflation has dropped from a peak of 8.9 percent in June 2022 to 3.4 percent in December 2023. The Fed’s goal is to lower inflation to two percent.
Markets are keeping a close eye on the Fed’s success, because they want to see rates move lower. Lower rates put more money in the pockets of businesses and consumers, which supports economic growth and higher stock prices.
Last week, few investors expected the Fed to begin lowering the federal funds rate this month; however, about three-fourths of them anticipated rates would begin to drop in March, according to data from the CME FedWatch Tool.
Major U.S. stock indices finished the week higher. Yields on most maturities of Treasuries moved lower from last Friday to this Friday.
The Guidance Wealth office will be closed
Monday, January 15th, in observance of Martin Luther King Jr. Day.
And we’re off…to a slow start.
Last week, investors appeared to suffer from a New Year’s hangover. The culprit was too much optimism.
After its December meeting, with inflation easing and the U.S. economy remaining resilient, the United States Federal Reserve (Fed) indicated that three rate cuts were possible in 2024. Assuming the Fed drops rates by 0.25 percentage points each time, the effective federal funds rate would fall by 0.75 percentage points to about 4.5 percent by the end of this year.
That was welcome news. Lower rates make borrowing less expensive for businesses and consumers. As a result, rate cuts could lead to lower interest rates on home and auto loans, as well as credit cards. In addition, lower rates could boost corporate profits and push stock prices higher.
Ebullient investors saw the inch and took a mile, extrapolating the possibility of three Fed rate cuts in 2024 to six rate cuts. Jeff Cox of CNBC explained. “Markets…followed up the meeting and Chair Jerome Powell’s press conference by pricing in an even more aggressive rate-cut path, anticipating 1.5 percentage points in reductions next year, double the [Fed’s] indicated pace.”
Investors’ buoyant outlook supported strong third-quarter performance and double-digit returns for major U.S. stock indices in 2023. However, investors recognized they may have taken things too far, and the U.S. stock market retreated for much of last week.
Friday’s employment report didn’t help matters. It confirmed the continued strength of the U.S. economy. Employers added 216,000 jobs in December, surpassing economists’ estimates, according to Megan Leonhardt of Barron’s. The unemployment rate remained at 3.7 percent and average hourly earnings were up 4.1 percent over the 12 months through December 2023.
The strong report lowered expectations that the Fed will cut the federal fund rate at its March meeting, reported Karishma Vanjani of Barron’s.
Last week, major U.S. stock indices finished the week lower, and the yield on the benchmark 10-year U.S. Treasury note rose.
2023 was a big year for U.S. stocks.
The story of 2023 has its roots in 2022, when the Standard & Poor’s (S&P) 500 Index lost almost 19.5 percent amid rising inflation and aggressive Federal Reserve rate hikes. As 2022 came to a close, many on Wall Street predicted further pain in the new year. Economists forecasted a 70 percent chance of recession in 2023, and consumer and investor confidence were both low.
Pessimism persisted well into 2023. Some of the negativity may have been due to loss aversion. Behavioral economics has found that the pain of losing is far more powerful than the pleasure of winning. Overall, investors were less bullish than usual for much of 2023, according to the AAII Investor Sentiment Survey. In addition, consumer sentiment fluctuated significantly over the year, often reflecting expectations for inflation and interest rates.
U.S. Stock Markets Finished the Year Higher
The S&P 500 trended higher from March through July. Early on, the rally was driven by just a few technology stocks; however, the gains became more widespread as inflation slowed, economic growth remained healthy, and the likelihood of recession receded. The rally cooled in August as investor confidence slipped when inflation data moved in the wrong direction, opening the door to additional Fed rate hikes. However, bullish sentiment improved again in October and remained above average throughout most of November and December.
In December, Jacob Sonenshine of Barron’s reported, “The main driver of the gains has been the decelerating pace of inflation, which has led the Federal Reserve to refrain from further interest-rate hikes over its past two meetings…That would enable the economy to continue growing and keep companies’ sales and profits on the rise. Lower rates also make future profits and dividends more valuable, lifting valuations for all sorts of companies from high-dividend payers to high-growth technology firms.”
In the United States, major stock indices finished 2023 with double-digit returns. The S&P 500 was up 24.2 percent for the year, the Dow Jones Industrial Average gained 13.7 percent, and the Nasdaq Composite rose 43.4 percent, reported Samantha Subin and Jesse Pound of CNBC.
A Brief Review of 2023
The year was filled with geopolitical uncertainty, including wars in Ukraine and the Middle East, and political divisions at home that led to a debt ceiling standoff and a failure to pass funding for the 2024 budget. Here are a few key events from last year:
With inflation nearing the Fed’s target, some think the U.S. central bank may have managed to tame inflation without leading the country into recession, an achievement known as a “soft landing”. If so, 2024 will indeed be a happy new year!
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If all you wanted for Christmas was two percent inflation, you’re in luck!
Barring unforeseen events, it appears the United States Federal Reserve (Fed) is on the cusp of accomplishing a feat many thought impossible – reducing inflation without causing a recession.
From March 2022 to July 2023, the Fed raised the federal funds rate 5.25 percent – the most aggressive increases in decades, reported Felix Richter of Statista. There was considerable skepticism about the Fed’s ability to bring inflation down to its 2 percent target, especially as prices continued to rise, with inflation peaking at 9.1 percent annualized in June of 2022.
As the nation headed into 2023, economists anticipated that rapid rate hikes would lead the U.S. into recession. They were wrong. Last week, the personal consumption expenditures (PCE) index showed prices dropping from October to November. Headline inflation was:
While rising rates drove inflation down, the U.S. economy continued to grow. So far this year, economic growth (after inflation) was 2.2 percent in the first quarter, 2.1 percent in the second quarter, and 4.9 percent in the third quarter of 2023. The Atlanta Federal Reserve’s GDPNow forecast suggests economic growth will remain in positive territory, up 2.3 percent, in the final quarter of the year.
Falling prices lifted consumers’ spirits. Consumer sentiment improved almost 14 percent from November into December, according to the University of Michigan’s Consumer Sentiment Survey. “All five index components rose this month, which has only occurred in 10% of readings since 1978. Expected business conditions surged over 25% for both the short and long run. All age, income, education, geographic, and political identification groups saw gains in sentiment this month,” reported Surveys of Consumers Director Joanne Hsu.
Financial markets welcomed the news. “…the S&P 500 notched an eight-week winning streak – the longest in more than five years. The Nasdaq 100 and a global gauge of equities logged equally lengthy runs – for the tech-heavy Nasdaq it was the longest since July 2021. U.S. bonds booked a fourth-straight week of gains – their best streak since March,” reported Cristin Flanagan of Bloomberg.