Week in Review: January 26, 2024

January 29, 2024

Recap & Commentary

Markets ended the week higher, fueled by positive economic data including 4Q GDP that surprised to the upside and core PCE inflation, the Fed’s preferred inflation measure, which decelerated more quickly than expected in the December. Despite the relatively modest gains, the S&P 500 managed to set four new record highs over the course of the week.

In July, Fed Chair Jay Powell added to growing investor optimism that the Fed might achieve a soft landing by noting that the central bank’s staff economists no longer expected a recession in 2023. Instead, they anticipated a “noticeable” slowdown in growth starting later in the year. At the time, the Bloomberg consensus forecast showed the economy contracting slightly in 4Q23 before reaccelerating in 2024.

Fast forward six months, and the economy continued its 2023 theme of consistently surprising to the upside, as 4Q23 economic activity grew 3.3%, its second fastest pace since 2021, trailing only 3Q23. At times in 2023, similar data would have fueled concerns about additional Fed rate hikes. Now, however, investors seem convinced that at most, such data will only delay the onset of rate cuts. Thus, markets moved higher on the data, heartened by the economy’s continued strength, reinforcing expectations of a soft landing.

Through Friday, 25% of S&P 500 companies had reported 4Q23 earnings.  Thus far, 69% have beaten their consensus estimate. According to industry group FactSet, consolidated earnings growth for the quarter is expected to be -1.4%.

Economic Commentary

Economic data came in better than anticipated in a busy week that was headlined by 4Q23 GDP and Core PCE, the Fed’s preferred inflation gauge.

Real GDP increased at a 3.3% annual rate in Q4, well ahead of the consensus forecast of 2%. The largest contribution to growth came from personal consumption (consumer spending), though all four major components of GDP were positive during the quarter. Business investment fell to its slowest pace of the year, suggesting business leaders remain cautious in their 2024 outlooks. While the quarter’s overall growth took a step down from Q3’s 4.9% reading, Q4 was less reliant on volatile categories such as government investment and inventory accumulation, to drive growth. For the full year, the economy grew  2.5%, defying the near unanimous expectation of a recession.

The markets also received good news regarding inflation. Core PCE rose 0.2% in December, in line with consensus forecasts.  The year over year comparison slowed from 3.2% in November to 2.9% in December, lower than expectations for a 3% increase. Over the past six months, Core PCE inflation has risen by less than the central bank’s 2% target, at a 1.9% annualized pace. On the spending front, questions persist about the state of the consumer and how long personal consumption can continue to propel growth.  Last month, incomes rose 0.3% while consumption rose 0.7%, as the personal savings rate fell to a 12-month low of 3.7%. In 2023 personal incomes rose 4.7%, lagging personal consumption’s 5.9% increase.

Of Note

Tensions in the Middle East continued to intensify as Houthi rebels directly attacked a US warship patrolling offshore. In addition, a drone attack in Jordan by Iran-backed militants, killed three US soldiers and wounded many others.

Market Indices   (As of 01/26/2024)

• Non-Farm Payrolls
• JOLTs
• ISM Manufacturing PMI
• Factory Orders
• Consumer Sentiment
• Weekly Jobless Claims