The full narrative will come together when the US stock market enters the last trading week of 2023.
The Federal Reserve is getting closer to its target of getting inflation back to 2%, according to inflation figures released on Friday. This puts the central bank on the path to lowering interest rates.
There are still very few signs of recession. Rates of interest have dropped from their autumn peak, which was more than ten years ago. The S&P 500 (\GSPC) and Dow Jones Industrial Average (\DJI) are approaching historic highs. This year, the Nasdaq Composite (~IXIC) has increased by more than 40%.
The biggest drama this coming week should be whether the stock market’s surge will lead to a record for the S&P 500 (the Dow achieved a record last week).
The Fed’s favoured inflation indicator, the Personal Consumption Expenditures Price Index, shows that prices in November increased 3.2% over the previous year on a “core” basis—a measure that omits food and energy. Since April 2021, this yearly rise has been the slowest.
However, closer examination of this data shows the central bank has essentially accomplished its objective.
“Core” PCE, measured on a six-month annualised basis, was 1.9% in November.
“This week saw a renewed attempt from some Fed officials to push back against market expectations for interest rate cuts but, with core PCE inflation running at an annualised pace of below 2% over the past six months, this final flurry of hawkishness isn’t fooling anyone,”
The market’s 2023 surge has been partially fueled by expectations that the Fed would act swiftly to lower interest rates in 2019.
The second half of this year has been all about rates, even if many investors will remember it for the AI-related excitement that sparked the tech trade after a dismal 2022.
As concerns about diminishing inflation pressures and, therefore, uncertainties about the easing of Fed policy from 22-year highs, impacted on markets, there was a fall in the US stock market in the fall of 2015. At the same time, Treasury rates surged to 16-year highs.
By 2023, when the stock market has pushed towards all-time highs, projections for 2024 have already become antiquated.
The Goldman Sachs equities strategy team raised its price prediction for the S&P 500 in 2024 from 4,700 to 5,100 last week.
The market wasn’t yet persuaded about the direction that inflation, the economy, and the Fed would go when many on Wall Street started releasing their year-ahead projections in mid-November.
As we close out the year, most people agree that the economy will keep expanding, inflation will decline, and the Fed will lower interest rates. Stated differently, a “soft landing” has emerged as the standard scenario driving up markets.
The team at Bespoke Investment Group also highlighted a few market statistics on Friday that serve as a reminder that history will probably consign these post-pandemic spasms to the trash can as we close off two of the most eventful years in recent market history.
The S&P 500 ended the day of November 30, 2023, at 4,567.80. The S&P 500 ended the day on November 30, 2021, at 4,567.00.
Of course, in between, investors saw the S&P 500 experience its worst year in a decade, and now the index is poised to have one of its greatest five years since the financial crisis. But the more time passes after this two-year period when stocks “went nowhere,” the less of the drama that surrounded both periods will stick in our memories.
Similarly, Bespoke reported that the seven biggest S&P 500 stocks by market capitalization at the beginning of 2022 lost a total of $4.9 trillion during the sell-off. The market capitalization of those seven stocks has climbed by $4.9 trillion overall this year.
Wall Street projections for 2024 indicate that investors will welcome the new year with what we’ll refer to as cautious optimism. The S&P 500 gains almost 9% annually on average; most analysts anticipate a rise of more like 5% in the upcoming year.
However, as TKer publisher and former managing editor of Yahoo Finance Sam Ro has pointed out, “average” years are unusual in the stock market. The S&P 500 has increased by 15% or more 33 times since 1957.