Stocks posted another good week with the S&P 500 up 1.06% on Solid economic data with a relatively calm in the bond market. Relative being the key word here amidst all the interest rate volatility of late, but the 10 year yield “only” moved up 14 bps from the prior week’s close and trading was contained inside the prior week’s range. {Source-DTN IQ and Optuma}
The Core PCE Price Index, the Feds preferred “Inflation Gauge” and last week’s big event, showed a monthly increase slightly higher than expected at 0.2%, but the year-over-year increase was slightly lower at 2.9%, down from 3.2%. This supports the expectation for a rate cut in March or May and would you just look at what the Fed’s “whisperer”, Nick Timiraos, put out over the weekend. He’s the guy the Fed likely leaks information to these days- there’s always one…
On the growth front last week, January flash PMIs were positive, with the manufacturing PMI rising above 50 to 50.3 and the service PMI moving further above 50 to 52.9. Both readings above 50 are considered positive signs for the economy and while the GDP headline reading appeared really hot at 3.3%, an inventory build inflated the number. Better measures of actual growth, such as Personal Consumption Expenditures and Final Sales to Domestic Purchasers, were around 2.8%. This type of growth aligns with the Fed’s goals and may also support rate cuts in the coming months. Lastly, the details of Durable Goods the report were solid, suggesting that business spending and investment are still positive.
Is the Goldilocks scenario really playing out in front of our eyes? Is the Fed achieving immaculate disinflation (a scenario where inflation comes down while the economy stays robust)? It sure looks like it!
This week will mark the first truly big data week in 2024, featuring a Fed meeting on Wednesday, a host of labor market data throughout the week and we will wrap up with Consumer Sentiment along with the the ISM Manufacturing PMI on Friday.
Source: www.tradingeconomics.com
I’m often trying to explain how Macroeconomic data, intermarket and technical analysis, sentiment and seasonals all play a role in the market’s behavior. When the stars line up, these different concepts reinforce each other, and right now we are witnessing just that. This is typical bull market behavior, and we are in the mature phase of it. The final piece is valuations, and valuations are derived from earnings. As we enter this earnings season, we are going to need to see strong data to support the upward momentum that’s in place. Momentum can go a long way and propel valuations to unforeseen heights, but it’s imperative to understand our position in the current market landscape.
Right now, the growth vs. value and high beta trade are leading the way while sentiment remains strong. Industrial metals and oil had a good week, likely due to the PBOC (China) finally cutting their reserve rate, and that helps to mitigate one of the “cracks” I’ve been paying close attention to lately along with the narrow market breadth. Just as that issue is dissipating, the geopolitical landscape heated up over the weekend with a drone strike that killed 3 American troops in Jordan…
In this ever-evolving market environment, observation and adaptability is paramount.
Stay vigilant and have a great week!
Important Disclosures: Past performance is not a guarantee of future results. The statements contained herein are solely based upon the opinions of Edward J. Sabo and the data available at the time of publication of this report, and there is no assurance that any predicted or implied results will actually occur. Information was obtained from third-party sources, which are believed to be reliable, but are not guaranteed as to their accuracy or completeness.