January 13, 2024 Market Update

The U.S. stock market resumed its rally that’s now been in effect for 10 out of the past 11 weeks.  Despite news of a modest pickup in consumer inflation and an expansion in Middle East conflict, the S&P 500 Index rose 1.8% for the trading week through Friday’s close.  The gain more than reversed the previous week’s loss, lifting the S&P to its highest level since January 2022.

Meanwhile, U.S. Treasury yields fell last week. The 10-year Note eased to 3.96% as markets continued to price in expectations that the Federal Reserve will soon start cutting interest rates.   

The Labor Department reported last Thursday that consumer prices rose a seasonally adjusted 0.3% in December, and by 3.4% from a year earlier.  But core prices, which exclude the often volatile food and energy items to better capture inflation’s underlying trend and favored by the Federal Reserve, were up 3.9% from a year earlier—the first time core prices have risen less than 4% since May 2021.

The Labor Department also reported that initial claims for unemployment remained near historic lows.  The softer core inflation news, combined with the low claims data, adds credence to the belief that America’s central bankers are unlikely to change interest rates when they meet on January 30th-31st.

Mr. Market expects the Fed's next move will be to lower rates, with many investors expecting the first reduction in March.  That seems a bit overly optimistic to me, but it does seem clear that the Fed made their final rate increase last July, when they lifted their benchmark rate to a range between 5.25% and 5.5%, a 23-year high.  

Rate cuts in 2024 would be good news for consumers since the federal funds rate is used by lenders to set borrowing costs on auto loans, credit cards, mortgages, and more.  Lower rates will also push bond prices higher and provide additional support for the current stock market rally. 

The risk is that markets have priced in a more aggressive interest-rate reduction policy than the Fed decides to implement.  If so, investors who bet on a fast and furious reduction in interest rates could be sadly disappointed.   

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