ND&S Weekly Commentary 1.30.24 – Markets Move Enen Higher as US GDP Surprises

The S&P 500 had five successive days of all-time highs last week.

For the week, the DJIA added 0.65% and the S&P 500 grew 1.07%. The tech-heavy Nasdaq finished up 0.94%. International equities also gained with the MSCI EAFE Index and emerging market equities (MSCI EM) up 2.01% and 1.47%, respectively. Small company stocks, represented by the Russell 2000, were 1.75% higher. Fixed income, represented by the Bloomberg/Barclays Aggregate, was close to unchanged, gaining 0.10% for the week as yields were unchanged. As a result, the 10 YR US Treasury closed at a yield of 4.15% – identical to the 1/19 close. Gold prices closed at $2,016.80/oz – down just 0.01%. Oil prices moved up 4.76% to $78.01 as tensions in the Red Sea continue to rise.

Last week’s economic news included two key reports – US GDP and PCE (core personal consumption expenditures). With consensus GDP estimates at 2%, the reported 3.3% GDP growth was a significant surprise. Recently, markets have had a negative reaction to “growthy surprises” like this because of fears and expectations that the Fed would be more hawkish or, at least, stay restrictive for longer. Now, the market seems convinced the Fed is finished with its tightening and holding and will begin to cut rates in 2024 and its hopes for the proverbial “soft-landing” are seemingly being realized. This pushed stock prices higher to new record levels. When the Fed’s preferred measure of inflation (PCE core) came in at 2.9% – the lowest rate of increase in three years – the market had more evidence that inflation is behaving and retreating.

What is yet to be resolved is how much the Fed should or will cut the overnight borrowing rate. As has been observed here before, there does not seem to be any data driven reasons for the Fed to make significant cuts, based on current conditions and trends. With inflation gradually slowing, GDP showing continued health, and unemployment rates still near optimal levels, what are the reasons for the Fed to make significant cuts? If the Fed does not make significant cuts, how does the bond market rationalize the rest of the yield curve? If after making a “soft-landing” to a stable economy, lending overnight brings ~5.5%, why does lending for 10 years bring ~4%? How much does the overnight rate need to decrease to have a 4% 10-year make sense? Is the Fed able to cut the overnight rate that much without restoking the inflation fire? It is puzzling, to say the least. Perhaps geopolitical events will erupt and disrupt before we can see how this plays out under relatively stable conditions. We hope that is not the case.

The Fed FOMC meets this week plus there are multiple important economic reports: Consumer Confidence and Sentiment, Employment Cost Index, PMI and ISM manufacturing data, Productivity, and it is earnings season. Through last week 25% of the S&P500 have reported Q$23 results with ~ 69% beating EPS estimates vs. a 5-year average of ~77% beating. The FOMC interest rate decision and Fed Chair Powell’s comments and press conference will get major attention. The market will have plenty to digest. Investors have, on average, shaken off caution and fears and are back in the swim.

We continue to advise investors to be disciplined in adhering to their investment policy and patient when the markets’ winds are pushing against the planned course.

“The pessimist complains about the wind; the optimist expects it to change; the realist adjusts the sails.” – Willim W. Ward