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.

The US unemployment rate is currently 3.7%, which is low compared to historical standards. This is notable considering that during the past two years, the U.S. economy experienced one of the sharpest rises in interest rates on record. Why does the unemployment rate remain low today?

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.

Stocks traded higher to start the new year, with the S&P 500, NASDAQ 100, and Dow Jones Industrial Average each setting new all-time highs. In continuation of last year’s trend, the companies with the biggest market caps accounted for a substantial portion of the early-year gains.

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.

In December 2023’s edition of the University of Michigan Survey of Consumers, there was notable development as the percentage of consumers expecting lower interest rates over the next 12 months rose to nearly 30% from 12% the prior month.

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.

Financial markets underwent a sizeable shift in the fourth quarter. Treasury yields spiked in Q3, reversed lower as inflation eased, and the Federal Reserve hinted at interest rate cuts in 2024. The decline in interest rates was a significant tailwind for stocks and bonds. Here, we will recap the fourth quarter and look ahead to 2024.

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 Federal Reserve has raised interest rates by more than 5% since March 2022. It has been the fastest pace of tightening in decades, but data shows the economy has been resilient thus far. The U.S. economy grew at a 5.2% annualized pace in the third quarter of 2023.

The S&P 500 recorded its biggest monthly gain since July 2022 and currently trades less than 5% below its all-time closing high. The NASDAQ 100 Index gained +10.8% as mega-cap growth stocks such as Microsoft, Apple, and NVIDIA traded toward new all-time highs.

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.

As we approach the end of the year, investors with significant capital gains or losses may consider a tax-loss harvesting strategy. Tax-loss harvesting offers tax advantages, but there are special considerations.

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.

The S&P 500 gained more than 20% through the end of July but has since declined 8.3% over the past three months, bringing its year-to-date gain to 10.6%. A significant factor behind the recent equity market sell-off has been the sharp rise in interest rates.