S&P 500: -1.52% DOW: -0.59% NASDAQ: -3.25% 10-YR Yield: 4.04%
Last Week on WallStreet - January 6th, 2024
Welcome to 2024! As 2023 fades into the rearview, we anticipate a year where markets grapple with the delayed effects of the Federal Reserve's tightening of policy and struggle to determine the trajectory of future monetary policy. In the first week of the new year, this uncertainty impacted equities, causing the S&P to break its nine-week streak of gains. After a robust rally in the final months of last year, traders took a retreated from the overbought market conditions at the start of this week. Later on, attention turned to Friday's job report as investors eagerly awaited clues on the Federal Reserve's next moves. Despite the jobs report being stronger than expected—which in the past would have led to a move lower—equities managed to end the day positive. Nevertheless, the strong job market adds to the uncertainty regarding the timing of rate cuts, suggesting that policy easing might be pushed further into 2024 than previously anticipated.
Beneath the surface, performance bifurcated as last year's winners took the brunt of the bearish sentiment. Technology (-4.6%) and Discretionary (-4.1%) names led the way down for the index. On the other side, defensive sectors, such as Healthcare (+2.1%) and Utilities (+1.8%), gained steam.
Job Gains Picked Up in December, Capping Year of Healthy Hiring
- The U.S. economy added 216,000 jobs last month, much higher than expectations and outpacing November's 173,000 rate
- For all of 2023, employers added 2.7 million jobs
- Average hourly earnings increased 0.4% in December, up 4.1% from a year ago
- Most of the job gains were found in government, healthcare, and hospitality sectors
The key takeaway - The December nonfarm payrolls report suggests that the labor market remains stronger than expected. Recent employment reports have shown a trend of a sustainable uptick in unemployment and a decrease in wage growth. However, December's data somewhat bucked this, indicating the economy's potential continued strength but also introducing more uncertainty into monetary policy projections. As a result of these positive indicators, markets may postpone their expectations for the initial rate cuts by the Federal Reserve, shifting them from early to late 2024. Should this adjustment in rate expectations occur, it will likely create headwinds for asset prices as the year progresses. Currently, market sentiment is optimistic, banking on a smooth transition of lowering inflation and maintaining economic stability. Deviation from this ideal scenario could lead to a downturn in equity markets.
Fed Officals Haven't Ruled Out Further Rate Hikes, Minutes Show
- According to the minutes, “several” officials said that the Fed might have to hold its benchmark rate steady “for longer than they currently anticipated.”
- Other members pushed back that some easing would be necessary
- In the minutes, "many participants remarked that an easing in financial conditions beyond what is appropriate could make it more difficult for [the Fed] to reach its inflation goal.”
The key takeaway - According to the Federal Reserve's December FOMC Meeting minutes, there is noticeable disagreement among committee members regarding the trajectory of monetary policy. Although there's a general consensus on the direction of rates moving downwards, the specifics regarding when and how quickly to implement these reductions remain uncertain. Despite market anticipations of an early and substantial rate-cutting cycle, possibly starting as soon as March with up to six cuts, FOMC members appear to have reservations about such a rapid easing strategy. Concerns were also noted about the effect expected rate cuts have on monetary conditions, with the current market expectations leading to lower interest rates throughout the economy. This could potentially complicate the Fed's efforts to moderate economic activity and control inflation.
US Economy Stumbles at Year's End, ISM Finds
- The Institute for Supply Management’s Service's survey dropped to 50.6% from 52.7% in the prior month, much lower than expected
- The new order's index, which provides a gauge of future demand, dropped 2.7 points to 52.8%
- The employment barometer fell 7.4 points to 43.3%
- The prices-paid index, a measure of inflation, slipped 0.9 points to 57.4%.
The key takeaway - Since recovering from the pandemic, the services sector has been the stronghold of the economy, compensating for weaker performances in other areas. However, the December ISM report indicated a weakening in this sector, moving from growth to nearly stagnating levels, even despite the expected boost from holiday season activities. While it's important to note that a single month's data from one indicator doesn't dictate an overall economic trend — particularly given the post-COVID era's challenge to traditional metrics — it's anticipated that the persistent high-rate environment maintained by the Federal Reserve will dampen economic activities in the coming year. This recent softening in the services sector might be an early sign of such impact.
From Around the Watercooler
Ford reported its best year of new vehicle sales since 2019, a day after GM reported the same
Amer Sports, the maker of Wilson tennis rackets, filed for an IPO that could reportedly be valued at up to $10 billion
Xerox plans to lay off 15% of its workforce as part of a broader reorganization
Fidelity believes that the value of X, formerly Twitter, has plunged 71.5% since Elon Musk purchased the social media giant