As we enter 2024, our indicators signal an improving financial environment. The year-end rally may extend into early January, but potential headwinds loom in 2024 Q1. We believe these headwinds stem from the market's optimistic rate-cut forecast and exuberance rather than an economic slowdown.

The stock market extended its recent rally this week, and investor sentiment continues to be positive, backed by the Federal Reserve Chairman Jerome Powell and the Federal Open Market Committee’s (FOMC) decision to hold the federal funds rate steady at 5.25%-5.50%.

The Leading Economic Index (LEI) declined for the 19th consecutive month in October, the longest streak since the 2008 financial crisis. It was also the LEI's lowest reading since May 2020. While the LEI indicates the growth rate is slowing, the Coincident Economic Index (CEI) continues to trend higher and sits at an all-time high.

The stock market continued to trend higher this week following Tuesday’s release of the Consumer Price Index (CPI), which showed progress on the inflation front. The release of the Producer Price Index (PPI) followed, showing that final consumer demand declined. This progress may allow the Federal Reserve to be less restrictive with monetary policy.

Last week, the U.S. Treasury announced its updated borrowing estimates and projected issuance for the next two quarters as the Fed holds interest rates steady. Meantime, at the halfway point of the third quarter earnings season, nearly 80% of the reporting S&P 500 companies had posted better-than-expected profits.

Navigating this cycle is particularly challenging due to its complexities. While macro historically matters over the long term, markets can diverge from macro in the near term. Seasonality is historically a tailwind when the S&P 500 is up through October, which historically has shown a 90% win rate.

US Gross Domestic Product (GDP), Durable Goods, and Home Sales underscore the economy's resilience despite the S&P 500 closing at 4,117, below more than 10% its recent peak in July.

Equities traded lower this week, with US large and small caps stocks producing similar returns while the Nasdaq underperformed. We expect quantitative tightening to continue for the foreseeable future.

Equity markets displayed a willingness to overlook geopolitical tensions this week, with investors focusing on monetary policy back home. A central theme was the debate over the recent surge in Treasury yields and how the subsequent tightening of financial conditions will impact the Fed's policy stance.

Investor sentiment has remained upbeat throughout 2023. Financial markets have rebounded from their 2022 sell-off, with the S&P 500 gaining more than 15% and credit spreads tightening. The Fed's tightening cycle is nearing an end, and its impact has been limited thus far compared to prior tightening cycles.

In August, the Consumer Price Index (CPI) rose 0.6%, following a 0.2% rise in July (Figure 1 ). It was the biggest monthly increase in 14 months, with the recent surge in gasoline prices accounting for more than half of the rise. Excluding food and energy, the index rose 0.3%, compared to 0.2% in July.

Investors were surprised by the 0.1% month-over-month increase in the Consumer Price Index (CPI) for August. The report will likely push the Federal Reserve to persist with its aggressive campaign of interest rate increases.

COVID-19 case counts are the most important data point driving markets currently. Markets are concerned the highly transmissible delta variant will delay the economic recovery.

The Fed is holding interest rates near 0% and expects to keep rates there through 2023