Market Note – January 31, 2024

By Hightower Great Lakes on January 31, 2024

Inflation Keeps Trending Downward

Last week, we received two highly anticipated data points: fourth quarter GDP and December PCE. The data highlights what we continue to emphasize: the economy is strong – much stronger than consensus expected a year ago – and inflation is trending towards the Fed’s 2% target.

Fourth quarter GDP expanded +3.3% q/q, compared with +1.8% expectations. Remember the beginning of last year when most pundits called for a recession? We consistently expected the economy to slow but chose to lean on data supporting a strong consumer to drive continued growth.

With inflation retreating, easing monetary policy and strong employment will continue to support consumer spending, which drives both the economy and corporate earnings.

Core PCE, the Fed’s preferred inflation indicator, expanded +2.9% y/y. The slowest pace since March 2021, this indicates the economy is steadily approaching the Fed’s 2% target. The three-month annualized pace is +1.52%, and the six-month annualized pace is +1.86%.

Chart 1: Fed’s Preferred Inflation Indicator Is Within Striking Distance of Fed’s Target[1]

Inflation and economic trends both point towards the Fed easing its monetary policy – all eyes will be on this week’s FOMC meeting. Expectations are that the Fed will keep its target rate steady this week, but could indicate a policy shift for March rate cuts.

Americans still ‘feel’ that inflation is high since prices remain higher than they were pre-pandemic, which is why we pay close attention to labor market conditions.

When labor markets are tight, higher wages support spending capacity. The four-week moving average for initial jobless claims is 202,250, down from 206,000 one year ago and far below the historical recessionary range of 350,000-375,000.

While wages expanded +4.1% y/y and +0.4% m/m in December, the average gas price in the United States is just $3.10, down -11% y/y. Similarly, mortgage rates are below 7%, compared to above 8% in October.

Consumers are showing a willingness to increase volume spending towards goods, and lower inflation pressure plus easier financial conditions should continue to support this dynamic. January’s flash manufacturing PMI indicated expansion well-ahead of expectations.

International Conflicts Place Emphasis for Investing in U.S. Markets

This weekend’s news that U.S. troops were killed in Jordan as a result of an Iran-backed militia is another disturbing and heart-wrenching development from the Middle East. It is certain that military and policy developments will continue.

The White House expects there to be a muted impact on inflation from the supply chain disruptions in the Red Sea.[2] The ongoing conflict will have an outsized impact for aerospace and defense, along with energy stocks. It also emphasizes U.S. markets as a safe haven for investors.

The conflict will continue to make headlines, and as investors, we are continuing to keep our heads down and focus on fundamentals for investment opportunities. A record $6 trillion in money market funds remains on the sidelines, which investors can reallocate into stock and bond markets as the allure of 5% ‘risk-free’ interest rates subsides.

Equity Market Year-to-Date Performance Split

The S&P 500 is up +2.6% to start the year, led by communication services and technology. Six sectors are contributing positive performance, while five sectors are in the red to start the year.

Growth is outperforming value, large cap stocks are outperforming small cap, and the U.S. stock market is outperforming the international non-U.S. market. In the S&P 500, 25% of companies have reported fourth quarter earnings.

Chart 2: U.S. Equity Markets Outperforming Non-U.S. Equity Markets[3]

Pent-Up Demand for Housing as Interest Rates Want to Retreat

Building permits expanded 6% y/y in December, its fastest pace since March 2022. New home sales expanded +4.4% y/y and +8% m/m, reflecting the pent-up demand from home buyers as mortgage rates fell during December.

Chart 3: Housing Activity Is Expanding Across Leading Indicators[4]

Even as interest rate targets remain steady, real interest rates, adjusted for inflation, are expanding higher. The Fed is deciding whether softening inflation means interest rates are unnecessarily restrictive, despite the robust economic growth.

This will support many markets, including housing, and most of which will benefit the banks. In addition, the government is running a deficit that is unsustainable, and lower interest rates will be necessary to continue funding fiscal policy with new treasury debt.

We expect the Fed to lower its interest rate target in 2024, which will ease pressure on government balance sheets, support the continued rebound in housing activity and various other markets that are interest rate-sensitive, and can drive broad earnings growth and appreciation across stock and bond markets.

Yields Whipsaw After Strong Economic Data and Lower Inflation, Stay Muted in Anticipation of Fed Meeting

U.S. Treasuries were volatile throughout the week after strong personal spending data, but a PCE number that broke below 3%, lower than expectations, drove yields lower to finish the week.

The U.S. 2-year yield fell 4 bps, 10-year traded flat, and 30-year yields rose 4 bps ahead of a week that brings a Treasury refunding announcement and a FOMC meeting. High yield spreads narrowed to a new bottom, falling 12 bps to +378 bps. Muni yields lowered by 1-4 bps across the curve.

The Week Ahead

Earnings – Tuesday: UPS, GM, PFE, GOOGL, AMD, SBUX, MSFT; Wednesday: MA, ODFL, BA, QCOM; Thursday: AFL, SWK, HON, MRK, PH, AAPL, CLX, AMZN; Friday: XOM, CVX.

Economics – Monday: Dallas Fed Index (January); Tuesday: JOLTS Job Openings (December), Consumer Confidence (January); Wednesday: January FOMC Meeting, Chicago PMI (January); Thursday: ISM Manufacturing (January), Productivity and Unit Labor Costs (Fourth Quarter); Friday: Nonfarm Payrolls and Unemployment Rate (January).

Return for Selected Indices^[5]

Click here to read last week’s Market Note (1/22).

Disclosures

Investment Solutions is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Some investment professionals may also be registered with Hightower Securities, LLC, member FINRA and SIPC. Advisory services are offered through Hightower Advisors, LLC. Securities are offered through Hightower Securities, LLC.

This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is neither indicative nor a guarantee of future results. The investment opportunities referenced herein may not be suitable for all investors.

All data or other information referenced herein is from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other data or information contained in this presentation is provided as general market commentary and does not constitute investment advice. Investment Solutions and Hightower Advisors, LLC or any of its affiliates make no representations or warranties express or implied as to the accuracy or completeness of the information or for statements or errors or omissions, or results obtained from the use of this information. Investment Solutions and Hightower Advisors, LLC assume no liability for any action made or taken in reliance on or relating in any way to this information. The information is provided as of the date referenced in the document. Such data and other information are subject to change without notice.

This document was created for informational purposes only; the opinions expressed herein are solely those of the author(s) and do not represent those of Hightower Advisors, LLC, or any of its affiliates.

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[1] Source: FactSet (chart). As of January 28, 2024.

[2] Source: Bloomberg. As of January 28, 2024.

[3] Source: FactSet (chart). As of January 28, 2024.

[4] Source: FactSet (chart). As of January 28, 2024.

[5] Source: Bloomberg. As of January 28, 2024.