Last Week on Wall Street

Last Week on WallStreet - December 16th, 2023

S&P 500: 2.49% DOW: 2.92% NASDAQ: 2.85% 10-YR Yield: 3.92%

What Happened?

Jerome Powell and team never disappoint in stirring up chaotic market activity, both positive and negative. In the latest episode, they shifted their stance notably, signaling a potential for rate cuts in 2024. This change marks a departure from their previously more rigid stance as they now anticipate three rate cuts next year, reflecting their confidence in having effectively tackled the issue of inflation. They hope to achieve the fabled 'soft landing,' a scenario where the Federal Reserve's policy tightening manages to control inflation without triggering a recession. Economic data this week seemed to support this optimistic outlook. The Consumer Price Index (CPI) report for November indicated a steady moderation in inflation, and retail sales figures surpassed expectations, suggesting that the economy may continue its resiliency. Reflecting this growing optimism, the S&P 500 experienced its seventh consecutive week of gains by the end of trading on Friday, marking the longest streak of weekly gains since 2017. Bullish sentiment is running high and, if this can continue, the index may be able to close out the year with a new all-time high, 2% above current levels.

Beneath the surface, the rising tide lifted all boats this week as every sector of the S&P 500 gained ground. The best performers were interest rate and economically sensitive areas led by Real Estate (+5.5) and Materials (+3.9%). The largest laggards were Communications (+0.7%) and Utilities (+0.8%).


Fed Begins Pivot Toward Lowering Rates as Inflation Declines

  • The Fed held its benchmark federal-funds rate steady at a 22-year high range between 5.25% and 5.5%
  • New projections show Fed officials now anticipate three rate cuts next year
  • Powell indicated officials were turning their attention to rate cuts because inflation has declined much faster than they expected
  • In their latest projections, officials see the core inflation rate falling to 2.4% at the end of next year

The key takeaway - This Federal Open Market Committee (FOMC) meeting marks a pivotal moment in the Federal Reserve's policy cycle, indicating the start of a significant test of the Fed's ability to balance different economic factors. Market participants have been anticipating rate cuts despite Fed officials focusing on the necessity of maintaining sufficiently restrictive policies to ensure inflation falls. However, the Fed has now pivoted, incorporating 75bps of rate cuts into its projections for next year. The Fed's decision to consider rate cuts is based on recent signs of inflation decreasing, which they expect to continue, allowing them to ease monetary policy. Yet, there's a delicate balance to maintain. The rate cuts may ultimately be a response to support an economy that might struggle under prolonged high rates. Conversely, if the economy remains resilient and rates are lowered too quickly, there's a risk of reigniting inflation, especially if economic activity intensifies. Jerome Powell and his team at the Federal Reserve are now navigating this balancing act. Their goal is to achieve a "soft landing" which many have tried and few have pulled off.


Inflation Slowed to a 3.1% Annual Rate in November

  • The consumer price index, a closely watched inflation gauge, increased 0.1% in November, and was up 3.1% from a year ago
  • Excluding volatile food and energy prices, the core CPI increased 0.3% on the month and 4% from a year ago
  • A 2.3% decrease in energy prices helped keep inflation in check, as gasoline fell 6% and fuel oil was off 2.7%
  • Shelter prices, which make up about one-third of the CPI weighting, increased 0.4% on the month

The key takeaway - The recent Consumer Price Index (CPI) reports have been a source of optimism for the Federal Reserve as it strives toward price stability, following one of the most intense inflation bouts in recent history. Since around April, there has been a noticeable trend of stabilization and a gradual decline in inflation rates, which have now decreased to 3.1%. However, as Federal Reserve officials have consistently emphasized, it's premature to dismiss concerns about inflation entirely. The core inflation rate, which is often considered a more reliable indicator of long-term inflation trends, remains at around 4%. Central bankers are keen to see this figure continue to decline before feeling entirely confident about reducing interest rates. A premature rate cut could potentially lead to a resurgence in inflation pressures. Another factor influencing the current state of inflation is the global decrease in energy prices, which has played a role in keeping headline inflation figures lower. However, there's a potential risk that if energy prices were to rise again to the levels seen a few months ago, this could undermine some of the recent progress in controlling inflation.


Jeffry Bartash - MarketWatch

Retail Sales Rebound in Good Start for US Holiday Shopping Season

  • Sales at U.S. retailers rose a solid 0.3% in November, greater than the expected 0.1% decline
  • Sales at internet retailers surged as did books, music, and other hobby items
  • Americans also spent more on clothes, furniture, health-care items, and new cars and trucks
  • Sales at bars and restaurants were also strong, climbing 1.6% in November

The key takeaway - The resilience of the American consumer-led economy is evident, as suggested by recent retail sales reports. Heading into the holiday season, there were widespread expectations among economists of a lackluster performance in holiday shopping, attributed to higher interest rates and other economic factors. However, these predictions were disproven, at least for the month of November, which encompasses the biggest event, Black Friday. For investors, the key focus now is on whether this consumer spending momentum will persist through the end of the year. This period is crucial for a more comprehensive understanding of the economy's performance and the extent to which consumer behavior can sustain its momentum into 2024. Many anticipate that this momentum might slow down due to the impact of higher interest rates on consumer demand. The potential effects of these higher rates and the depth of any ensuing economic downturn are topics of intense debate on Wall Street.


From Around the Watercooler

Etsy laid off 11% of its staff blaming “a very challenging macro and competitive environment.” This follows other major layoffs from the likes of Hasbro and Spotify

Pope Francis called for a global treaty to regulate artificial intelligence, which he said is a “risk to our survival”

The EU decided to open negotiations to add Ukraine and Moldova as members, the European Council announced yesterday

Choice Hotels launched a hostile $8 billion takeover bid of its budget hotel rival Wyndham, after its repeated attempts to make a deal were rebuffed