Weekly market insights

1. Disinflation Trend to Continue: The disinflation trend is expected to persist as wage growth softens. Used car prices and housing inflation are likely to cool further, with housing inflation moderating at an accelerating pace later in the year.
2. Banking Sector Stability: The U.S. banking system is expected to remain sound and resilient. Large banks are favored over regional banks, and investors are recommended to underweight the financial services sector. Concerns about commercial real estate loans, rising credit losses, and potential regulatory changes could impact profitability.
3. Economic Growth Softening in the First Half of 2024: U.S. economic growth is expected to soften in the first half of 2024, falling below trend but potentially staying positive. Consumption is likely to slow, but a rebound in manufacturing and housing later in the year could provide a buffer. A better-balanced labor market and higher productivity should help inflation return to target, supporting the start of a loosening in Fed policy.
4. Fed Policy Shift: The Federal Reserve is expected to shift from a tightening to a more neutral stance in 2024, with indications of a rate-cutting cycle. Market expectations for rate cuts (six in total) may lead to volatility, with a push and pull between market expectations and Fed messaging. The Fed's pivot to a more neutral stance is viewed as market-positive, contributing to a soft landing for the economy.
5. Market Diversification Opportunities: The "Magnificent 7" (mega-cap technology companies) drove market gains in 2023, but there is an expectation for a broader market rally in 2024. Opportunities for long-term investors are seen in lagging segments of the equity market, including small-caps, dividend stocks, cyclical sectors, and value-style investments. Diversification is predicted to gain prominence in 2024 as the strength and sustainability of the bull market are likely confirmed.
6. Reasons for Optimism in 2024: Interest rates are expected to have peaked, paving the way for rate cuts by the Fed. Inflation continues to moderate. Corporate earnings are rebounding, and valuations outside of the major gainers remain reasonable.
7. U.S. Stocks End Mixed to Close Out Strong Year: The major benchmarks closed the year with a mixed performance, with the S&P 500 Index marking its ninth straight weekly gain. The Nasdaq Composite led the annual gains, recording its sixth-largest annual gain since 1971. Despite a holiday-shortened week, trading volumes and market moves were muted.
8. Hopes Rise for AI Devices Despite Possible Hurdles: Developments in the AI sector included Apple executives joining forces to develop an AI device. However, potential hurdles arose as The New York Times filed a lawsuit against generative AI companies for copyright infringement, impacting the business models of firms like OpenAI.
9. Data Suggest Modest Slowdown to End the Year: Economic indicators pointed to a modest slowdown, with Mid-Atlantic manufacturing activity contracting sharply in December. Business activity in the Chicago region also moved back into contraction territory. Pending home sales remained flat in November, defying expectations for an increase. Weekly jobless claims unexpectedly rose to their highest level since the start of the month.
10. Europe Optimism and Rate Cut Expectations: In local currency terms, the STOXX Europe 600 Index reached almost two-year highs, driven by growing optimism about interest rate cuts in the early part of the next year. Inflation in Spain slowed unexpectedly, leading economists to anticipate rate cuts by the European Central Bank (ECB) in the first half of 2024. The FTSE 100 in the UK rose amid inflation concerns.
11. UK House Prices Fall, BoE Policy Remains Tight: Nationwide reported unchanged house prices in December, marking the largest annual decline since 2008. Despite recent falls in mortgage rates, the Nationwide Building Society did not expect a rapid rebound in prices or activity. Bank of England (BoE) Governor Andrew Bailey emphasized the need for policy to remain tight to address inflation concerns.
12. Japan Stock Markets End Higher, BoJ Policy Discussion: Japan's stock markets posted gains in the final week, supported by expectations of the Bank of Japan's (BoJ) continuation of its ultralow interest rate policy. Economic data, including steady unemployment rates and mixed industrial output figures, had limited market impact. BoJ Governor Kazuo Ueda signaled a possible shift in policy, emphasizing the importance of wage talks.
13. China Equity Rise, Regulatory Developments: Chinese equities rose in the last week as the government approved new online games, easing concerns about a gaming sector clampdown. Profits at industrial firms increased in November, supported by Beijing's stimulus measures. However, China's economic outlook remains mixed, with GDP growth expected to slow in 2024 due to property issues and deflationary pressures.
14. Other Key Markets: Argentina and Brazil: President Javier Milei proposed extensive reforms, including changes to the tax system and electoral policies. The reforms face opposition, with a national strike called in response. The omnibus bill follows an emergency decree scaling back the government's role in the economy. In Brazil, official inflation data for December exceeded expectations, with consumer prices rising annually and on a month-over-month basis. Despite falling short of consensus estimates, Brazilian equities, represented by the Bovespa Index, gained ground.
15. U.S. Economic Outlook: A resilient U.S. economy in 2023 was driven by ample liquidity and ongoing post-pandemic supports. Despite the fastest pace of credit tightening in four decades, the consumer, accounting for two-thirds of economic activity, remained robust. Investment spending, fueled by 2022 government stimulus and private investment, contributed to growth exceeding the 2022 pace. Lingering post-pandemic supports, including pent-up demand, catch-up hiring, and early inflation break, strengthened the economy.
16. International Economic Challenges: International economic activity faced headwinds, primarily from rising U.S. and overseas interest rates. Higher borrowing costs and global deflationary pressures, influenced by U.S. rate increases, slowed international growth. Europe grappled with a trade slowdown, ECB interest rate hikes, and a lack of fiscal stimulus. In Asia, China's economy struggled with deflation due to consumer caution, a slumping property sector, and limited stimulus measures.
17. U.S. Economic Slowdown Predictions: Despite the resilient U.S. economy, signs of a gradual economic slowdown emerged. Excess pandemic cash balances depleted, credit delinquencies rose, and households increasingly relied on credit for purchases. Corporate earnings transcripts indicated early weakness in consumer spending. The surge in real interest rates in 2023 was expected to stress the economy further as the Federal Reserve maintained a steady federal funds rate.
18. Federal Reserve Policy and 2024 Predictions: Anticipating a pivotal 2024, the Federal Reserve was expected to hold the federal funds rate steady in the 5.25–5.50% range. Disinflation gathering momentum through a moderate economic slowdown could set the stage for rate cuts in the second half of 2024. The U.S. presidential election was likely to exacerbate market volatility. A defensive portfolio strategy, focusing on quality in both equity and fixed-income positions, was recommended until signs of a new economic cycle emerged.
19. Equities Performance in 2023: Equities experienced wide swings driven by the most aggressive Fed rate hiking cycle in decades, three regional banks' failures, rapid inflation decline, and the AI market boom. A rally ensued until inflation paused its trend, and long-term interest rates reached multi-year highs. A subsequent furious rally, fueled by expectations of the end of the Fed hiking cycle, led to major stock indexes ending the year higher. U.S. Large Caps outperformed, and the guidance matched the performance stack rank.
20. Fixed Income Market Highlights: Fixed-income markets displayed positive returns in 2023 after two negative years. Both rates and credit markets, including high-yield corporate bonds and emerging market debt, saw strong returns. U.S. credit markets outperformed, driven by higher yields without significant credit risk concerns. In Europe, aggressive ECB interest rate hikes pushed German bund yields to decade-high levels. Hedging against the U.S. dollar impacted returns for some bond categories.
21. Commodity Performance in 2023: The commodity super-cycle continued in its third year, but 2023 marked the first negative performance year. Tighter financial conditions, a strong U.S. dollar, and slowing global economic growth impacted commodities. Industrial metals and energy underperformed, while agriculture and precious metals outperformed. Gold, in particular, reached an all-time high despite headwinds.
22. Opportunities and Uncertainties in Alternatives: Uncertainties surrounding inflation, interest rates, and the job market influenced financial markets in 2023. Market reversals provided unique opportunities for long-term investors. Emphasis on quality and defensive strategies was maintained, with relative value-arbitrage and long/short credit strategies adding value. Private capital strategies faced headwinds, but small-and mid-buyout and growth equity strategies performed well. Global macro, despite market reversals, remained favorable. Rising credit stress created opportunities in distressed credit and private capital secondary markets.
23. Market Sentiment and Santa Claus Rally: Stock investors are contemplating the possibility of a "Santa Claus rally" to close out the year. The official timeframe for this rally is typically the week between Christmas Day and New Year's Day. Despite the traditional timing, the equity market has experienced a robust rally over the past two months, with the S&P 500 Index surging nearly 16% since late October and up more than 24% year-to-date.
24. Market Performance and Historical Trends: December is historically the third-strongest month for stock-market performance, and the three-month period from November 1 through the end of January tends to be seasonally favorable for equities. The current rally has propelled the S&P 500 Index to levels well ahead of fair value, reaching near an all-time record high as the year concludes.
25. Market Valuations and 2024 Outlook: Based on the analysis, the S&P 500 Index is considered well above fair value, trading near the top of the 2024 year-end target range. Current valuations, relative to the earnings estimate for the next year ($220), are perceived as stretched. The outlook for higher stock prices in the coming 12 months appears challenging, particularly in the first part of the year. The anticipation is that the market will struggle to post meaningful gains as the economy slows before bottoming out in 2024.
26. Factors Influencing Market Volatility: Two key factors contributing to potential market volatility are the expected economic slowdown and skepticism regarding the market consensus for Federal Reserve rate cuts. The analysis suggests that the market may face challenges until consensus expectations adjust to these negative trends.
27. Investment Strategy Recommendations: The focus continues to be on domestic exposure over international. Preference for quality large-cap stocks over mid and small caps. Favoring both short-term and long-term segments of the fixed-income market. Recommending trimming exposure in Information Technology, Communication Services, and Consumer Discretionary sectors. Suggests reallocating those funds to Health Care, Industrials, and Materials sectors.

Previous update:

1. Market Outlook for 2024: 2024 is expected to build on the gains of 2023, but not without some bumps along the way. There is a belief in continued positive performance for equities, supported by a shift towards less restrictive Federal Reserve policy and rising corporate earnings.
2. Market Winning Streak: The S&P 500 experienced an eight-week winning streak, which is historically significant. While it is acknowledged that winning streaks eventually end, there's a belief that the broader bull market is not near its end.
3. Annual Equity Returns: 2023 is ranked as the 12th best year for the S&P 500 since 1980. Historically, strong years often see a favorable encore, with an average gain of 8% in the subsequent year for years that performed better.
4. Sector Performance: Technology, communication services, and consumer discretionary sectors were the leaders in 2023, gaining more than 40%. Defensive sectors such as utilities, healthcare, and consumer staples lagged. The expectation is that the positive trend may continue into 2024.
5. Market Pullbacks: 2023 experienced two notable pullbacks, but these were relatively moderate compared to historical intra-year drawdowns. The anticipation for 2024 is that there will be bumps, potentially from a realignment of expectations for Fed policy, economic concerns, or geopolitical uncertainties.
6. Interest Rates: The data suggests an inflection point in interest rates in 2023, with a peak in October. There is an expectation of moderating inflation and eventual Fed rate cuts leading to yield curve steepening in 2024, as short-term rates fall faster than longer-term yields.
7. Economic Growth: Despite Fed rate hikes, the U.S. economy showed resilience in 2023, with average quarterly GDP growth exceeding 3%. The consumer was a key driver, benefiting from a strong labor market. The prediction for 2024 includes a slowdown in economic vigor in the first half, but a softening rather than a severe downturn in the labor market, with renewed strength in GDP growth in the latter half of the year.
8. U.S. Economy and Equities: The U.S. economy is expected to experience below-trend real growth and gradually lower inflation. Disinflation is likely to continue, pushing bond yields lower. The U.S. dollar is expected to depreciate. The macro strategy suggests a neutral stance on equities due to below-trend real growth and geopolitical risks. However, there's an acknowledgment that there's still a probability of a recession. The market is anticipated to be choppy, but a long rotation in equities is expected, including a move up in areas that have lagged.
9. Global Markets: Global central bank policy rates are likely to move lower as long as supply-side inflation remains benign. A weaker U.S. dollar is expected to support international equities, but caution is advised until there is a clear sign of global cyclical momentum and activity picking up.
10. Portfolio Strategy: A "balanced," portfolio strategy with adjustments focused on factors such as Value and Growth, Small- and Mid-capitalization shares versus Large-capitalization, and U.S. versus non-U.S. markets is recommended. Despite anticipating a choppy market, the strategy remains fully invested to start the year.
11. Lessons Learned from 2023: Economic forecasters and investment strategists who predicted a recession in 2023 missed the Federal Reserve's reaction function, which included liquidity injections despite raising interest rates. The equity market showed contentment with real growth without profits as long as profits stopped contracting.
12. Outlook on U.S. Earnings and Geopolitical Risks: U.S. earnings momentum softened as fiscal stimulus faded, but fiscal stimulus and monetary liquidity remain supportive. Geopolitical risks are highlighted, but the U.S. is considered to stand out positively in this environment due to consumer-led resilience, food and energy security, and innovation.
13. Labor Market and Profits Outlook: The labor market is seen as a transmission mechanism from a soft landing to a hard landing, with signs of a shakier backdrop, including falling job openings. The profits cycle is still trying to make a new high, and economy-wide profits growth in 2024 is expected to be limited due to slowing nominal growth.
14. Fiscal Situation: Fiscal policy is supportive but contributes to an unsustainable long-run fiscal deficit situation. Concerns exist about how markets will price in unsustainable deficits, with potential impacts on nonstimulus-driven private sector business investment spending.
15. Global Trade and Emerging Markets: Global goods trade and global industrial production are near zero on a year-over-year basis. Emerging Market Equities are closely linked to these cycles, and signs of a turn might lead to upgrades in select emerging markets.
16. U.S. Exceptionalism: The U.S. is described as dynamic, resilient, productive, diversified, and wealthy. Despite global shocks, the U.S. economy has performed well, adding significantly to its economic base this decade. The outperformance of U.S. Equities is attributed to America's dominance in diverse industries and its ability to incubate new firms and industries.
17. Fixed Income Strategy: Diversification remains a key aspect of portfolio construction. Positive correlations between equity and bond prices are challenged, with the belief that Fixed Income can provide higher and more stable returns in the current yield environment.
18. Corporate Fixed-Income Outlook: The market is expected to experience price declines in the first half of 2024 due to an economic slowdown. However, a potential economic recovery in the second half could lead to a resurgence in credit markets. Credit risk appetite is expected to remain elevated, with fund flows favoring high-quality corporate issuers.
19. Key Drivers of Corporate Fixed-Income Performance: Investment-grade corporate issuers are expected to enter 2024 with strong credit metrics and support from major rating agencies. Despite some concerns about expensive valuations, there may be opportunities in the double-B credit rating space within high-yield bonds. Issuance for both investment-grade and high-yield corporates is expected to continue, with a slight increase in 2024.
20. High-Yield Fixed Income: High-yield valuations are considered somewhat expensive, and adjustments in guidance are anticipated when more attractive entry credit spreads and yields become available. High-yield default rates are expected to peak in the first quarter of 2024 and then decline by year-end if corporate earnings improve.
21. Equity Markets: The equity market is expected to maintain a defensive positioning in the early part of 2024, reflecting a call for an economic slowdown. U.S. Large Cap Equities are favored, U.S. Mid Cap Equities are neutral, and U.S. Small Cap Equities are considered most unfavorable due to concerns about quality metrics.
22. Real Assets - Oil Prices: Oil prices have experienced a decline, attributed in part to a buildup of oil inventories in the U.S. The growth in inventories may be peaking, suggesting the potential for a floor in oil prices.
23. Infrastructure Investments: Infrastructure investments are expected to benefit from long-term tailwinds, including defensive and inflation-hedged returns, sustainability and digitization trends, and government spending support. Despite a dip in capital raised in the first quarter of 2023, infrastructure investments showed resilience in the second and third quarters.
24. Technical Roadmap for 2024: The secular trend for equities is expected to remain positive with the potential to trend higher into the mid-2030s. The 3-4-year market cycle is emphasized as a key focus for investors, characterized by stair-step patterns and higher lows near the 4-year (200-week) moving average. The lows in Q4 2022 are viewed as defining the lows for the current cycle, with a recovery likely to continue through 2024.
25. Breakouts Above 2-Year Trading Ranges: Equity markets, including the S&P 500 and Dow Industrial Average, are breaking out of 2-year trading ranges, indicating an improving market cycle. Technical analysis suggests potential upside in 2024, with estimated pause points at S&P 5638 and Dow 42,076 over the next 12-24 months. Breakouts above 2-year ranges signal a broader cycle recovery.
26. 4-Year Presidential Cycle: Average and median S&P 500 returns during year 4 and year 1 of the 4-year presidential cycle align reasonably well with the 12-24 month upside extension levels mentioned earlier. Historical data suggests that year 4 of an election year (2024) can be choppy in the first half, but the overall technical expectation for 2024 is positive.
27. Weekly S&P 500 Quadrant Balance Indicators: Weekly momentum indicators are currently in overbought territory moving into Q1, suggests a peak development by mid-late Q1. This may coincide with the digestion of earnings reports by investors and a reevaluation of optimism for interest rate cuts. The bottom line is an expectation for equity markets to consolidate recent gains in Q1.
28. Market Overview: The S&P 500 has experienced a 16% climb since late October, driven by a dovish shift in Fed messaging and lower interest rates. The momentum is expected to carry into year-end, with a "Santa Claus rally" anticipated. However, short-term volatility may arise due to sentiment and economic growth risks. The market has shown signs of potential overvaluation, considering the shift from expectations of "higher for longer" to expectations of "steep cuts." The AAII Bull/Bear Sentiment Survey is at its highest level in over a year, raising the question of whether the market is setting itself up for disappointment.
29. Macro: US Economy: The U.S. economy continues to perform well, supported by an undersupplied labor market and fiscal stimulus. Despite signs of a softening labor market and consumer focus on value, positive retail sales and PMI services indicate expectations for consumption. However, concerns arise about the historical precedents of yield curve inversion, the length of inversion, and tight bank lending, suggesting potential economic weakness.
30. Technical Analysis - S&P 500: The S&P 500's technical analysis indicates a climb of 16% since late October, fueled by a dovish Fed and lower interest rates. The "Santa Claus rally" is expected to outperform, historically averaging a 1.32% gain with a 79% win rate. However, the market is deemed overbought, and potential short-term resistance may be encountered near prior highs. Despite potential volatility and pullbacks, weakness is viewed as an opportunity.
31. Rotation and Diversification: Recent signals suggest rotation in the market, with relative strength in lagging areas picking up. The market's focus on Tech mega-caps in 2023 is expected to broaden in 2024, presenting opportunities in areas left behind. The dominance of the "Magnificent 7" Tech stocks in 2023 highlights the importance of diversification, and the expectation is for market performance to broaden in 2024, favoring active management.
32. Market Overview: Inflation cools more than expected in the U.S., UK, and Japan. The Nasdaq 100 and Dow advance further into record territory, marking the longest weekly winning streak since 2017. S&P 500 approaches its all-time intraday high. Communication services and energy stocks lead gains, boosted by positive developments in the tech and oil sectors.
33. U.S.: Fed's messaging, reassuring comments by officials contribute to the extended winning streak. S&P 500, Nasdaq 100, and Dow hit new records. Inflation data aligns with Fed's goals of low inflation and low unemployment. Positive economic surprises include housing starts surge, existing home sales, and consumer confidence. Expectations for steeper rate cuts in 2024 rise, impacting interest rate expectations and Treasury yield curve.
34. Europe: STOXX Europe 600 remains near one-year high. UK experiences a sharp slowdown in inflation to 3.9%, and GDP revisions indicate economic challenges. German manufacturing sentiment declines, raising recession concerns. ECB policymakers douse early rate cut hopes, emphasizing stability in inflation.
35. Japan: Nikkei 225 and TOPIX gain modestly. Bank of Japan retains accommodative policy, dispelling expectations of near-term interest rate hikes. BoJ Governor emphasizes the need to scrutinize inflation trends before considering an exit strategy. Japan's core consumer price index softens to 2.5% YoY in November.
36. China: Chinese stocks decline as the government introduces new restrictions on the gaming sector. Regulations target spending and rewards for online video games, impacting market value. Chinese banks leave loan prime rates unchanged, but expectations persist for further policy easing in 2024.
37. Other Key Markets: S&P upgrades Brazil's sovereign credit rating to BB, citing significant tax code reform. Ibovespa posts gains, benefiting from economic reforms and strong year-to-date momentum. Argentine President Milei announces reforms to privatize state-owned firms and reduce government intervention, triggering mixed reactions in markets.
38. Market Overview: Last week's retail sales report surpasses expectations, signaling positive trends in consumer spending. Total retail sales increase 0.3% m/m in November, with a more substantial growth of 0.6% m/m excluding auto and gas. Auto sales rebound 0.5%, contributing to the overall positive momentum. Sales in food services, furniture, health & personal care, and sporting goods show gains, while electronics & appliances and building materials witness declines, indicating a consumer preference for services.
39. Economic Indicators: Sales in the control group, crucial for GDP calculations, rise 0.4% in November, surpassing expectations and leading to an upward revision in Q4 GDP estimates. The Atlanta Fed's GDPNow model projects real GDP growth at 2.6% q/q in 4Q23, up from the previous estimate of 1.2%. This optimistic economic outlook is reinforced by favorable CPI and PPI readings, a dovish FOMC pivot, and a cooler-than-expected PPI report.
40. Market Sentiment: The confluence of positive economic data and a dovish FOMC meeting fuels market optimism, fostering hope for a "soft landing." Near-term market support is expected to persist, but as 2024 progresses, challenges may arise. The potential for a bumpier path forward is anticipated, especially with slowing economic growth and persistent inflation above 2%.
41. Corporate Profits: Favorable economic conditions, including moderate CPI and PPI, coupled with the prospect of lower interest rates in the coming year, are expected to support corporate profits. Solid retail sales defy earlier gloomy expectations for consumer demand noted in 3Q earnings calls.

Previous update:

1. Continued Positive Momentum in the Near Term: The positive momentum in both stocks and bonds is likely to continue in the near term, especially during the holiday season and year-end. The Federal Reserve's dovish outlook, with the possibility of rate cuts in 2024, has contributed to the rally in both stocks and bonds.
2. Market Leadership Broadening: The recent broadening of market leadership, with small-cap stocks, real estate, and high-quality dividend stocks outperforming, is expected to continue. Lagging asset classes, such as cyclical sectors, value parts of the market, small- and mid-cap stocks, and investment-grade bonds, may continue to play catch-up.
3. Shift in Portfolio Positioning: Cash may not be as attractive in 2024, as rates are likely to head lower. The trend of money flowing into CDs and money-market funds may pause or reverse. Investors who are overweight in cash may consider deploying some of their funds into strategic allocations in equities and bonds, as there are still attractive opportunities in the markets.
4. Potential Slowdown in Gains and Increased Volatility in the New Year: While positive momentum may continue in the near term, the pace of gains is expected to slow, and bouts of volatility may emerge in the new year, especially if economic growth softens. Markets may have already priced in some of the better fundamental news, and further positive drivers of sentiment may be limited.
5. Reevaluation of Investment Portfolios: With the Federal Reserve shifting from hiking to cutting mode, investors may reevaluate their investment portfolios heading into 2024. Themes such as reinvestment risk and opportunity cost associated with cash-like instruments may lead investors to consider alternative investments aligned with their financial goals.
6. Opportunities in Specific Asset Classes: Opportunities may arise in cyclical sectors, value parts of the market, small- and mid-cap stocks, and investment-grade bonds. Periods of volatility could be utilized by investors to rebalance and diversify their portfolios as market leadership potentially becomes much broader in 2024.
7. Macro Strategy and Economic Outlook: The financial markets are optimistic about the economy's resilience despite an aggressive Federal Reserve tightening campaign. The softening of incoming indicators is not indicative of a recession, and there is confidence in the possibility of future Fed rate cuts. The mix of indicators includes a surge in household net worth, strong government spending, elevated profits, and abundant liquidity, contributing to a positive economic outlook. The expectation is for a rotation in equities, with a move up in areas that have lagged and potential for a substantive rally in the next year.
8. Climate Change and COP28: The UN climate change summit (COP28) highlights that the world is falling short of the target to limit global temperature rise. Decarbonization is expected to be a major investment theme for the current decade and beyond. Despite progress, global emissions are still rising, emphasizing the need for continued efforts to address climate change. Clean energy production and related materials are likely to benefit from increased focus on decarbonization.
9. Federal Reserve's Monetary Policy: The outlook for 2024 includes a focus on potential Fed rate cuts due to moderating inflation and economic data. Historical data on Fed easing cycles suggests that the equity market's performance after the first rate cut varies widely and is dependent on macroeconomic elements. The timing of the first rate cut is uncertain, with factors such as inflation trends influencing the decision. Portfolio considerations suggest maintaining a neutral stance and emphasizing the importance of appropriate exposures in a well-balanced portfolio.
10. Economic Growth and Inflation: The U.S. economy appears to be softening from the third-quarter spurt, and there are concerns about the sustainability of the growth. Economic indicators, including manufacturing surveys and consumer spending, indicate a potential slowdown. The moderation in inflation is noted, and the Federal Reserve's efforts are expected to bring inflation under control, potentially leading to lower policy rates.
11. Global Economic Landscape: Global economic growth is influenced by factors such as weak China and Eurozone growth, geopolitical turmoil, and aggressive Fed rate hikes. Emerging market support, rebounding OECD leading indicators, and better-than-expected economic growth in certain regions contribute to a nuanced global economic picture.
12. Investment Strategy: A balanced investment approach is recommended, considering factors such as value and growth, small- and mid-cap versus large-cap, and U.S. versus non-U.S. equities. Caution is advised due to prevailing uncertainties in the global and domestic economic landscape. Despite progress in climate change mitigation, decarbonization is expected to remain a major long-term investment theme.
13. Equity Markets: The equity markets are anticipated to continue their positive trend, resolving the two-year trading ranges to the upside in 2024. The technical analysis suggests similarities to prior market cycles, and the market is expected to strengthen through 2024 into 2025. Despite potential volatility due to the 2024 US election cycle, the broader cycle backdrop is expected to support further upside for stocks.
14. Russell 2000 Small-Cap Index: The Russell 2000 small-cap index is currently lagging but shows early signs of improvement, especially with interest rates likely having established cycle highs in November. Participation in smaller-cap stocks is expected to expand throughout 2024, but there is no conclusive evidence yet that small caps will reverse their three-year downtrend against the S&P 500. A critical support level at 1641 is identified, and a break below that level could signal economic deterioration, while a move above the recent trading range highs at 2100 would confirm a new upcycle for smaller-cap stocks.
15. US 10-Year Yields: US 10-year yields remain in a downtrend after peaking at 5%, and the recent FOMC meeting reinforces this trend. The 10-year yield is testing an important support band between 3.9-4.1%, with the expectation that bounces, though possible, will be short-lived given the longer-term cycle momentum has peaked. If 10-year yields break below 3.9%, the next support is anticipated near 3.7%.
16. Semiconductors and Industrials: Both the SOX Semiconductor index and the S&P 500 Industrial sector are resolving two-plus year trading ranges to the upside, indicating positive technical behavior. The SOX index is behaving consistently with an emerging bull market, making new cycle highs after rebounding from the 2022 bear market. The S&P 500 Industrial sector, having consolidated in a broad trading range for two years, is on the verge of making all-time cycle highs. The technical patterns of these economically sensitive industries do not suggest an impending recession in 2024 but align with an improving equity market cycle, implying further upside next year. Investors are encouraged to stay optimistic through 2024 unless there is a decay in the price behavior of these industries.
17. U.S.: The S&P 500, Nasdaq Composite, and Dow Jones Industrial Average recorded their seventh consecutive week of gains, marking the longest streak for the S&P 500 since 2017. This propelled the first two benchmarks to 52-week highs and the Dow to an all-time record. The gains were broadly based, with an equally weighted S&P 500 index outpacing its market-weighted counterpart. Small-caps also surged, lifting the Russell 2000 Index out of bear market territory. Trading volumes were elevated, and investors showed a preference for stocks with the largest short interest. The Cboe Volatility Index (VIX) fell to its lowest level in the post-COVID era. Producer prices rose at the slowest pace in nearly three years, contributing to a more benign inflation environment. The Federal Reserve signaled more substantial rate cuts ahead in 2024, leading to a strong market advance. Long-term U.S. Treasury yields decreased sharply on the inflation data and Fed signals, with the yield on the 10-year U.S. Treasury note falling below 4% for the first time since July.
18. Europe: In local currency terms, the pan-European STOXX Europe 600 Index ended the week higher as markets expected key central banks to cut interest rates in 2024. Major stock indexes showed mixed performance, with France’s CAC 40 gaining, while Germany’s DAX and Italy’s FTSE MIB were modestly lower. The UK’s FTSE 100 added to its value. The European Central Bank left its key deposit rate unchanged at a record high of 4.0% but cut its inflation and growth forecasts for 2023 and 2024. Business activity in the eurozone shrank in December, indicating economic challenges. The Bank of England kept rates steady but maintained a tightening bias.
19. Japan: Japan’s stock markets rose, supported by the U.S. Federal Reserve's indication of a pivot away from monetary policy tightening. The Nikkei 225 Index gained, while the TOPIX Index also rose. The yield on the 10-year Japanese government bond fell as speculation about the Bank of Japan ending its negative interest rate policy waned. Data releases showed a mixed picture of Japan’s economy, with PMI data indicating mild expansion, and the BoJ’s tankan survey suggesting growing optimism among large manufacturers. Prime Minister Fumio Kishida faced a political funds scandal, causing a decline in popularity and credibility.
20. China: Chinese equities declined amid persistent deflationary pressures. The Shanghai Composite Index and CSI 300 fell, while the Hang Seng Index in Hong Kong rose amid a global stock rally. China’s consumer price index fell, and the producer price index dropped more than expected, indicating deflation concerns. November data showed mixed economic indicators, with industrial production growing better than expected, retail sales missing expectations, and fixed asset investment rising weaker than forecast. The People’s Bank of China injected liquidity into the banking system, anticipating policy support in 2024. Officials drafted guidelines for boosting domestic consumption and investment to drive growth in 2024.
21. Other Key Markets: In Brazil, the central bank reduced its key interest rate as expected, citing a less adverse global environment and signs of lower core inflation. In Mexico, the central bank kept the overnight interbank interest rate unchanged, noting resilient world economic activity but anticipating a deceleration.
22. Labor Market Dynamics: The nuanced picture painted by last week's labor data suggests that the labor market is undergoing shifts. While job openings fell, nonfarm payrolls rose, contributing to a decline in the unemployment rate. The return of auto union workers to the workforce played a role in this increase. The moderation in wage growth and quits rate indicates some stabilization in the labor market, with the potential for gradual adjustments in wage dynamics.
23. Wage Growth and Inflation Expectations: Despite current wage growth being above the Fed's target level, the cumulative real wage growth since the end of the pandemic recession is negative. This suggests that wage pressure may be more responsive to past inflation than an indicator of future inflation. If this trend continues, it implies that current wage pressures might not necessarily translate into sustained inflationary pressures in the future.
24. Market Expectations and Fed Policy: The futures market anticipates between four and five rate cuts in 2024, starting as early as the first quarter. However, the data implies that unless the labor market significantly weakens, and inflation promptly falls back to the Fed's 2% target, the central bank may choose a more measured pace of easing than what the market currently expects. The upcoming FOMC meeting is seen as critical in clarifying whether market sentiment is more dovish than the actual Fed communications, potentially impacting future market expectations.