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December 15, 2023 Market Update

The U.S. stock market extended its rally for a seventh straight week.  The S&P 500 Index rose 2.5% in the trading week through Friday, December 15th.  The benchmark is approaching its record high, set in January 2022, and is now less than 2% below that peak.

A key factor that’s fueling the rise in stocks: falling U.S. Treasury yields.  The benchmark 10-year rate, for example, dropped sharply, ending the week at 3.91% -- the lowest since July.

Consumer inflation dipped slightly in November, to a 3.1% annual rate, based on the November consumer price index (CPI), which was released last week.  Core inflation — which strips out the volatile food and energy categories and is considered a better gauge of underlying inflation — accelerated 0.3% last month as compared to October’s 0.2% rise.  Core prices were unchanged at 4% for the annual pace, which is twice the Fed’s 2% target rate for inflation.

The slight increase in CPI was not enough to cause the Federal Reserve to raise short-term interest rates above their current 5.25%-to-5.5% range at their meeting last week.  In their policy statement, Fed officials acknowledged how far inflation has fallen, and they expect to cut rates by three-quarters of a percentage point next year – a much bigger cut compared with a single quarter-point cut they expected for 2024 in the September outlook.

Fed officials are rightly concerned about easing up on interest rates too soon, an oversight that could reignite inflation.  At the same time, if the Fed keeps rates high for too long, they could spark an unintended recession.

So the trillion-dollar question is whether the Fed will cook up a perfect bowl of porridge -- not too hot, not too cold.  This time last year, many were saying the Fed was following a recipe for disaster, but now it seems that what they’ve cooked up will turn out just right.

That’s all for now.  Have a great weekend and invest wisely my friends.