January 27, 2024

The U.S. stock market rose for a third straight week.  Following upbeat economic news, the S&P 500 Index closed up 1.1% for the trading week on Friday, fractionally below the record high that was set on Thursday.

A key piece of news that’s supporting a bullish outlook: the U.S. economy in last year’s fourth quarter grew substantially more than economists predicted.  The government also reported that the Federal Reserve’s preferred inflation measure fell below 3% for the first time in nearly three years, based on the year-over-year change in the core personal consumption expenditures (PCE) index through December.  In turn, the latest inflation data offers fresh support for thinking that the central bank will soon start cutting interest rates.

With equity prices rallying, investors are asking: what is driving stocks higher?  Several catalysts are on the short list of likely answers:

• As noted, inflation is cooling.  It’s premature for the Fed to conclude that it’s achieved its objective of cutting inflation to the central bank’s 2% target, but the latest numbers suggest that the goal post is near.  In fact, quarterly core PCE data suggests the end game has already arrived.  This alternative measure of inflation rose at an annualized 2% rate in Q4 vs. the previous quarter – the second straight quarter for matching the Fed’s target.  

• Wages are rising.  After a record 25 consecutive months of worker income failing to keep pace with rising prices, wages have now outpaced inflation for eight straight months.

• Consumer spending remains strong.  Real wage growth has encouraged consumers to spend more.  Inflation adjusted retail sales rose 1.4% in December, the first such increase since October 2022.

• Better-than-expected corporate earnings.  FactSet reports that as of January 19th, 62% of S&P 500 companies have reported a positive EPS surprise and 62% of S&P 500 companies have reported a positive revenue surprise.

What could upset the apple cart?

• The widely anticipated recession finally appears later in 2024.

• A major policy mistake by the Federal Reserve.

• Rising interest rates allow bonds to attract more investor dollars, possibly triggering a selloff in the stock market.

• The labor market weakens and, as a result, consumers scale back spending.

• Politics, which will become an increasingly influential factor, for good or ill, as the November election draws closer.

• A widening Middle East war, which arguably is already unfolding.

• Something completely unexpected, which I believe is always the biggest potential threat.

Investing in stocks always comes with risks, which is why over the long run stocks generate greater returns than less risky alternatives.

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