In recent weeks, uncertainty surrounding the macroeconomy and geopolitics has weighed down share prices, most visibly those of banks, semiconductors, and software companies, particularly small-cap stocks. Overall, price volatility has increased. In such an environment, investors would do well to stay with leading companies with proven earnings and cash-flow track records.

This week, the BLS reported that the Consumer Price Index (CPI) gained 0.4% on a monthly basis, which was stronger than what investors had anticipated and on par with the prior read. Investors are concerned that with inflation proving resilient, the Fed might decide to implement fewer rate cuts than hoped for and later this year than expected. The consensus on Wall Street is that the Fed may only reduce interest rates in one or two increments in the year's second half.

Despite stronger-than-expected inflation data for January and February, Fed Chairman Jerome Powell anticipates cuts to short-term interest rates in the second half of this year. Indications are that the domestic economy remains healthy, but growth is easing. Though employment has proven resilient, new hires and wage increases are slowing.

This week saw the release of the minutes from the latest Federal Open Market Committee (FOMC) meeting held on January 30–31, 2024. Federal Reserve officials were concerned about upside inflation risks, driven by still strong demand. Overall, the FOMC minutes were more hawkish than dovish concerning potential near-term monetary policy decisions.

The initial data releases for January paint a picture of a sluggish start to 2024. While job growth showed resilience, there were concerns about consumer spending and industrial output. Our take is that the growth rate is slowing as the lagged effects of tightening work through the system. However, without a sharp deceleration in the data, the U.S. appears unlikely to enter a recession in 1H 2024.

This week, we recap several macro events, including the Standard & Poor’s 500 (S&P 500) closing above the 5,000 mark, a new milestone for the US market. In addition, the US Bureau of Labor Statistics (BLS) released a strong January jobs report, which showed that 353,000 jobs were created in January, far exceeding the analyst’s forecast of 185,000.

In Q4 2023, U.S. GDP expanded at a +3.3% annual pace, a slowdown from Q3’s +4.9% but the second-strongest growth since Q4 2021. The U.S. Bureau of Economic Analysis (BEA) reported this week that the Personal Consumption Expenditures (PCE) price index was up 0.2% for December vs. the 0.1% decline posted in November.

Since March 2022, the Fed has raised rates by a total of 5.25%. With the tightening cycle nearly 20 months old, concerns are growing about a 2024 economic slowdown. We examine several potential catalysts.

Investors on Wall Street have been anticipating a further pronounced easing of inflation. This week, the release of the December Producer Price Index (PPI) and Consumer Price Index (CPI) reports showed inflation running slightly hotter than expected. However, the long-term trend continues to be favorable.

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.