The Markets
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. 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:
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. The Markets 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! Guidance Wealth will be closed Monday, January 1st for New Year’s Day.
Holiday hours may vary, please call ahead to schedule an appointment before stopping by our office The Markets 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. Guidance Wealth will be closed Monday, December 25th for Christmas and Monday, January 1st for New Year’s Day.
Holiday hours may vary, please call ahead to schedule an appointment before stopping by our office. The Markets Have rates peaked? Last week, at its final policy meeting for 2023, the United States Federal Reserve indicated that rates may have peaked. After the meeting, Chair Jerome Powell said: “As we approach the end of the year, it is natural to look back on the progress that has been made toward our dual mandate objectives. Inflation has eased from its highs, and this has come without a significant increase in unemployment. That is very good news… “While we believe that our policy rate is likely at or near its peak for this tightening cycle, the economy has surprised forecasters in many ways since the pandemic, and ongoing progress toward our 2 percent inflation objective is not assured. We are prepared to tighten policy further if appropriate. We are committed to…bring inflation sustainably down to 2 percent over time, and to keeping policy restrictive until we are confident that inflation is on a path to that objective.” Powell’s post-meeting comments added to positive inflation news from earlier in the week. The annual rate of inflation, as measured by the Consumer Price Index (CPI), fell to 3.1 percent in November from 3.2 percent in October. The inflation picture wasn’t quite as rosy as that number suggests, though. Both headline inflation (+0.1) and core inflation (which excludes food and energy prices, +0.3) ticked higher month-to-month, and core inflation was 4.0 percent over the previous year. The primary contributor to annual core inflation was the cost of shelter, which includes rent, owners’ equivalent rent, lodging, and renters’ and homeowners’ insurance. It was responsible for nearly 70 percent of the total increase in core CPI. Key contributors included:
Global stock and bond markets celebrated falling inflation and the likelihood that Fed rate hikes have ended. Vildana Hajric, Jess Menton, Carter Johnson, and Elena Popina of Bloomberg reported: “Virtually no corner of financial markets was left out of a cross-asset advance which began Wednesday and extended into Thursday trading: Global shares spiked higher, with gauges from the tech heavy Nasdaq 100 to Brazil’s benchmark Ibovespa on track to close at record highs. Short-term Treasuries posted their best day since March, while world currencies surged against the dollar and corporate bonds rallied.” By the end of the week, major U.S. stock indices were at 52-week highs, and the yield on the benchmark 10-year U.S. Treasury fell to 4.03 percent, reported Brian Evans and Sarah Min of CNBC. The Markets
Still exceeding expectations. Last week, the United States Treasury market rallied. Yields fell and bond prices rose as some bond market investors enthusiastically embraced the idea that the Federal Reserve will soon change course. Michael Mackenzie and Rich Miller of Bloomberg explained: “Softening inflation and employment data in the past month have convinced investors that the Federal Reserve is done raising interest rates and ignited bets that cuts of at least 1.25 percentage points are in store over the next 12 months. Treasury yields, which touched highs of 5% as recently as October, have declined sharply, with the U.S. 10-year benchmark sliding more than three-quarters of a percentage point.” Bond investors were hoping that last week’s unemployment report would show jobs and wage growth slowing in November. Instead, employers added more jobs than expected (199,000 jobs vs. 180,000), and the unemployment rate fell to 3.7 percent. On Friday, the Treasury market reversed course. Yields on long and short-term Treasury bonds rose sharply and prices fell, reported Karishma Vanjani of Barron’s. The employment report also showed that average hourly earnings increased in November – rising 4 percent year-over-year. Wages have risen faster than inflation for seven months, reported Sarah Foster of Bankrate. However, many workers are still feeling a pinch. “While inflation has come down, broadly speaking, prices have not. There is a kind of continuing, virtual sticker shock that continues to weigh on the minds and pocketbooks of consumers that is meaningful,” according to Senior Bankrate Economic Analyst Mark Hamrick. Last week, the Standard & Poor’s 500 Index gained for the sixth consecutive week, according to Bloomberg, and yields on most maturities of U.S. Treasuries moved higher. The Markets
We’re cycling along. It’s easy to forget that economic activity tends to move in cycles. A full cycle, known as the business cycle, typically includes four stages:
“It might be tempting to think the stages of the business cycle are like the cycles on your dishwasher – regular cycles that occur in predictable patterns: The rinse cycle always begins after the wash cycle has completed, and each rinse always lasts the same length of time…But there is nothing ‘regular’ about the business cycle,” wrote Scott A. Wolla in the St. Louis Federal Reserve’s Page One Economics® blog. At the start of the fourth quarter, the United States was in the late cycle stage of expansion, according to Fidelity Insights. That doesn’t necessarily mean we’re heading into a contraction, though. Expansions usually end when the economy experiences a shock of some kind, reported Wolla. “Economists suggest that shocks that cause recessions might include financial market disruptions, international disturbances, technology shocks, energy price shocks, and actions taken by monetary policymakers to restrain inflation.” Major U.S. stock indices finished last week higher, reported Barron’s, and U.S. Treasury yields moved lower as investors embraced the idea that rate cuts may be ahead in 2024. |
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