December Economic Update
Market Summary
November saw the major US market averages retrace higher to test the past summer’s recent highs. There wasn’t a single factor that led stocks higher but rather an absence of bad news combined with a steep decline in oil prices which pushed down short-term inflation concerns. The S&P 500 regained 8.92%, the Nasdaq Composite led with 10.67%, while both the Dow Jones Industrial Average and the Russell 2000 small cap index generally paced the S&P 500 with 8.77% and 8.83%, respectively. (1)
Economic Developments
There weren’t many economic surprises last month with most of the data coming in as expected. The closely watched inflation metrics were within the recent range with year-over-year Core CPI (which excludes food and energy prices) holding steady at 4.0% compared to 4.1% last month. Headline CPI which accounts for food and energy dropped to 3.2% which is half a percent lower than the previous report yet higher than the 3% low seen back in July. A major contributing factor has been the reversal in crude oil and gasoline prices over the past two months. Since the recent peak back in September, crude oil prices have dropped over 20% as of the writing of this article. (2,3)
Softening consumer demand remained at the forefront of concerns last month with major retailers such as Target, Walmart, Home Depot, and Best Buy released statements signaling slowing demand heading into this holiday season. Consumers have been increasingly cost sensitive to higher prices driven by inflation over the past two years combined with higher borrowing costs and the reinstatement of student loan payments. The job market has also been cooling over the past several months and the most recent employment report showed only 150,000 jobs were added last month which is the lowest amount since August of 2021. (4,5,6)
The Federal Reserve
As mentioned in last month’s newsletter, the US central bank decided to keep interest rates steady at their most recent policy meeting on November 1st. The Fed has since released more statements detailing their policy stance moving into 2024. While they acknowledge inflation has retreated from the highs of last year, they are keeping the door open for more interest rate increases if inflation becomes entrenched or if the US economy remains too strong. Fed Chair Jerome Powell has stated there are no intentions to lower interest rates in the foreseeable future. (7)
Looking Forward…
A well-defined trading range has been established on the major indices from the October lows up to the July highs. While concerns regarding interest rates and inflation continue to wane, the indications of slowing consumer demand will likely continue to come to the forefront as stock valuations remain elevated on a relative and historical basis. What is historically a bullish time of year, the rapid retracement seen in November has the markets stretched to overbought readings. Further upside advancement is possible, but the odds generally favor sideways consolidation or a retracement back into the range to cool off overbought extremes.
Monthly Financial Tip:
Given the desire to travel and live well, the first few years of retirement may be expensive ones. Before and during those years, be mindful of economic and market cycles. They could affect your portfolio, and, by extension, your plans.
Citations:
1. WSJ.com, Nov 30, 2023
2. Investing.com, Nov 14, 2023
3. Finance.yahoo.com, Dec 05, 2023
4. Risnews.com, Nov 20, 2023
5. Reuters.com, Nov 13 & 21, 2023
6. Investing.com, Nov 03, 2023
Disclaimers:
This post has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. Bob Lawson is not engaged in rendering legal or accounting services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
