Economic Update 1-16-2024

• Economic data for the week included consumer price inflation coming in a bit stronger than expected, but a slight improvement on a year-over-year basis compared to the prior month. On the other hand, producer price inflation came in a bit weaker than expected. 
• Equities saw gains in developed markets, while emerging markets declined, led by weakness in China. Bonds fared positively as yields pulled back along with eroding inflation worries. Commodities were mixed for the week, with gold higher and crude oil lower. 

U.S. stocks saw gains last week, with inflation results seeing mixed sentiment on the consumer side, while producer prices were a positive sign. Sector results were led by technology and communications up 3-5%, while energy and utilities lagged with negative returns of -2%. Real estate gained slightly along with a drop in interest rates.  

Earnings season for Q4 began last week, with the big banks reporting first, as usual. It’s expected that some of Q3’s earnings strength was pulled forward and will dampen Q4 results. Per FactSet, Q4 S&P 500 year-over-year earnings growth is expected to come in at -0.1%; however, the last several quarters have seen an improvement of several percent as earnings season progressed, with downcast expectations having been exceeded. For Q4, the strongest sectors are expected to be communications, utilities, and consumer discretionary, with earnings growth of 20-40%, with energy and materials lagging, with earnings of -20% to -30%. Revenue is expected to run at about a 3% growth rate, led by 6% gains in real estate, technology, and communications. For the full year 2023, earnings growth is expected to be barely positive at 0.5%, well below average, although hopes for Q1 2024 remain near average (at 6%), and full year 2024 up near 12%. Full year estimates don’t provide much clarity about the impact on earnings from recession expectations, though, which could include a positive path throughout the year, or a dip and later recovery, as has been the case in the past. Very early earnings growth estimates for 2025 show an even better rate of 13%. While some watchers view these as a bit optimistic, stock prices have tended to follow earnings over time (short-term sentiment and valuation impact aside), which creates a better story than some are predicting. 

Foreign stocks were mixed, ending higher overall led by gains in Japan and Europe to a lesser extent. Japanese stocks have continued to shine under stimulative central bank policy and a weaker yen, boosting trade. Dovish European central bank comments about the worst of inflation being over were coupled with weaker economic data generally, keeping the continent on the cusp of recession. Emerging markets fell back, as China saw further declines in the midst of weak economic activity and outright deflation in several measures. Insofar as the Taiwan elections went over the weekend, the ruling Democratic Progressive Party (DPP) won the presidency—this is the party promoting the country’s independent identity and rejecting China’s historical claims. China has been lobbying against the candidate over the past week, with this being another wrinkle in keeping tensions elevated. Taiwan is a world leader in semiconductor manufacturing, with this conflict being seen as a potential long-term Achilles heel for the high-flying U.S. technology stock sector, as the one offset to their fundamental financial strength and market dominance. 

Bonds saw gains along with falling yields, in keeping with decent inflation results. The 10-year Treasury seems to have found a landing spot at around 4%, balanced by sticky inflation but also downside risks. Investment-grade corporates and high yield outperformed governments, with returns over a percent each, with tightening spreads. Foreign bonds were mixed, with little change in the U.S. dollar, with emerging market dollar bonds gaining with a rally in risk assets generally. 

Commodities were little changed as a whole last week, with a percent gain in precious metals offset by declines of roughly the same magnitude in agriculture, energy, and industrial metals. Crude oil fell over a percent last week to $73/barrel, despite seeing an uptick later in the week with reports of U.S. military strikes at Houthi rebels in Yemen, the group recently attacking commercial vessels in the Red Sea. This is in line with typical crude oil behavior with any type of military escalation in the region. 

In a financial side note, the SEC finally approved 11 spot bitcoin ETFs for trading, after a decade of debate since the first application was submitted. This closed the loop on the issue and comes after long-standing funds that could invest in bitcoin futures contracts as well as closed-end funds that owned crypto. The controversy had been based on fraud detection capabilities, as well as philosophical questions about how crypto would be regulated—as currencies, commodities, securities, or none of the above. One dissenting SEC commissioner described the decision as “unsound,” summing up the feelings of skeptics concerned about risks in crypto-based products. The SEC commissioner himself described bitcoin as a “speculative, volatile asset that’s also used for illicit activity.” A variety of industry players, including big banks and fund families, have moved in on the action—this should probably be viewed less as an endorsement but rather as a marketing opportunity. 

Period ending 1/12/2024	1 Week %	YTD %
DJIA	0.35	-0.21
S&P 500	1.87	0.34
NASDAQ	3.09	-0.24
Russell 2000	0.00	-3.73
MSCI-EAFE	0.87	-0.40
MSCI-EM	-0.57	-2.65
Bloomberg U.S. Aggregate	0.92	-0.29

U.S. Treasury Yields	3 Mo.	2 Yr.	5 Yr.	10 Yr.	30 Yr.
12/31/2023	5.40	4.23	3.84	3.88	4.03
1/5/2024	5.47	4.40	4.02	4.05	4.21
1/12/2024	5.45	4.14	3.84	3.96	4.20

Sources:  LSA Portfolio Analytics, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger’s, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder’s, Standard & Poor’s, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research.  Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends.  Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.                                                                                    

The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness.  All information and opinions expressed are subject to change without notice.  Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product.