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Market Recap – January 29, 2024

Keel Point

January 29, 2024

The big economic news last week was the better-than-expected growth in the U.S. economy and decline in inflation.  Financial markets responded positively with the S&P 500 reaching a new high.  With positive earnings growth and likely interest rate cuts this spring, the outlook for U.S. stock prices is attractive. 

  • 2023 Q4 GDP growth was up 3.3% (annualized), with 2023 GDP growth averaging 2.5%, notwithstanding the higher interest rates. This compares favorably to 1.9% GDP growth in 2022.  Although U.S. economic growth is expected to slow in 2024, the growing consensus is for it not to dip into recession.
  • The Fed’s preferred measure of inflation – the core Personal Consumption Expenditures (“PCE”) deflator – came in where we expected for December: up 0.2% for the month and up 2.9% for all of 2023.  Most important, however, is that core PCE inflation over the last three months annualized at 1.5% and at 1.9% over the last half of 2023 – the Fed’s target.
  • Financial markets read this as inflation being beaten without a painful recession. S. stock markets reacted positively.  The S&P 500 was up 1.04% last week and up 2.54% so far in 2024. The 10-year Treasury yield closed the week at 4.16% which is up from 3.86% at the beginning of the year, but it is likely to ease back below 4% later in the year.
  • The Fed should be cutting interest rates already, but it doesn’t want to be embarrassed by an inflation rebound. So, no change in interest rates is expected at the Fed’s FOMC meetings tomorrow and Wednesday.  In the meantime, the higher interest rates are providing an “after inflation,” real return of 3.25% which is tough for businesses but good for savers.
  • When rate cuts begin in March or May because inflation remains low and the economy is not in a recession, U.S. stock markets are likely to experience the “soft landing” surge we saw in 1995-1996, fueled by continuing growth in earnings and generative AI stimulated productivity growth – akin to what internet investments provided in the mid- to late-1990s.

The U.S. economy stands out in contrast to the rest of the world which is struggling with recession, no and low economic growth.  China’s economy is flailing from policy mistakes and demographic problems.  Eurozone data last week indicated its economies are contracting by around 0.2% over the last quarter. 

  • There are varying opinions on why the U.S. is outperforming: more proactive U.S. fiscal and monetary stimulus in response to the Covid pandemic, an invigorated entrepreneurial spirit, and early adoption of generative AI through rising business investments.

 

 

Disclosure:  Securities offered through Keel Point Capital, LLC, Member FINRA and SPIC.  Brokerage and Investment Advisory Services are offered under the Keel Point brand. Investment Advisory Services offered by Keel Point, LLC, an affiliate of Keel Point Capital, LLC. While reasonable efforts have been made to provide data from sources considered to be reliable, no guarantee of accuracy is given. Keel Point does not give tax, accounting, regulatory, or legal advice to its clients.

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