Hope you are all doing well. Happy and Healthy Holidays! We have arrived at my last update of 2023. I will start up again in the New Year. The major U.S. stock indexes climbed nearly 3%, posting their seventh positive week in a row. The Dow rose to a record level, eclipsing its previous high set on January 4, 2022. The S&P 500 was about 1% below its all-time high while the NASDAQ was about 8% shy of its historic peak. With the holidays upon us I have chosen to break down this week’s update using the must have toys of past holidays.
Rubik’s Cube – 1980
The market soared at the prospect of near-term interest-rate cuts. The Fed seems to have solved the Rubik’s cube that is an economic soft landing. The U.S. Federal Reserve kept its benchmark interest rate unchanged at a range of 5.25% to 5.50% for its third meeting in a row but indicated that it’s likely to shift soon to a more accommodative stance. Projections from most Fed members indicated the potential for three rate cuts in 2024. As recently as September, the Fed had projected one more rate hike this year followed by two cuts next year. Will we have a soft landing? The Fed is forecasting lower economic growth and inflation next year. Lower growth is not the same as recession.
The Fed also left its forecast for the unemployment rate unchanged at 4.1%, and it expects it to remain steady at this rate through 2026. This is also just modestly higher than its expectation of a 3.8% unemployment rate in 2023. So according to the Fed we will have economic growth albeit at a slower pace and moderating inflation and no meaningful decline in joblessness. That folks is a soft landing. Rate hiking cycles typically lead to recessions and a sharper rise in unemployment. It does not appear that is going to happen.
Slip ‘N Slide -1961
The shifting rate outlook has caused yields to slip and slide, with the 30 year Treasury seeing its yield slide all the way down to about 4 %. This sparked a price rally in the bond market. The yield of the 10-year U.S. Treasury bond also fell below 4.00% on Thursday for the first time since late July. I am starting to be cautiously optimistic about bonds but I think the market is still over reacting and irrationally exuberant over this last Fed meeting. The market is pricing in up to six rate cuts in 2024. The economy is not showing signs of recession. As a result, I still expect the Fed to be in no hurry to cut interest rates. They will gradually bring down rates. I would be surprised if we see a rate cut before September. Even if they do cut, I would be shocked if it is more than 3 times next year.
Easy Bake Oven -1963
Small cap stocks are cooking like a pink cake in an easy bake oven. Small-caps continued to rally in the wake of Wednesday’s U.S. Federal Reserve meeting. The Fed meeting propelled the small-cap benchmark, the Russell 2000 Index, to a weekly gain of nearly 6%. Although the index has lagged its large-cap peers year to date, the Russell 2000 has surged more than 21% since a recent low on October 27. What has been great about this leg of the market rally is that it is not contained to just seven large cap stocks, it seems to be more broad based. I would not be shocked if small caps stocks continue their run of outperformance into the New Year.
Super Soaker -1990
While the U.S. economy continues to manage to avoid getting blasted by the super soaker that is rate hikes. The Eurozone economies continue to get drenched. Business survey results released on Friday pointed to the potential for an economic recession in the eurozone, as monthly readings in Germany and France indicated declines in business activity across services and manufacturing. The readings follow a report indicating that GDP across the eurozone was essentially flat in this year’s third quarter. I continue to favor U.S. stocks over international stocks.
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