The Markets
 
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.
 

​The Markets
 
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. 

​The Markets
 
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:
 

• Headline inflation, as measured by the Consumer Price Index, suggested inflation was headed in the wrong direction last month – higher. It showed prices rising more than expected (0.3 percent, month-to-month) in December 2023. In November, prices rose less (0.1 percent, month-to-month).

 

• Core inflation, which excludes volatile food and energy prices, showed inflation was steady. Prices rose by the same amount (0.3 percent, month-to-month) in November and December.

 

• Producer prices are the prices producers received for goods and services. Last week, the Producer Price Index showed inflation was headed in the right direction – lower. Producer prices fell (-0.1 percent, month-to-month) in November and December.

 

• Conflict in the Middle East could stoke inflation by sending the prices of oil and shipping higher.

 
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. 
 
 ​
The Markets
 
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.