The year-end rally that I forecast a month ago has arrived. Seldom have we seen a prettier Control Panel. In addition to the charts, the economic fundamentals have moved in a positive direction that supports the bullish trend into 2024.
Inflation could be back in central banks’ comfort zones by the end of 2024 after multidecade highs in North America, Europe
By Gwynn Guilford, The Wall Street Journal, Dec. 24, 2023
Call it a Christmas miracle: Inflation around the globe is slowing way faster than expected. If economists are right, that gift will keep on giving next year, bringing inflation back to normal levels for the first time in three years. … Falling inflation should cushion economic growth in two ways: by bolstering household purchasing power and enabling central banks to cut interest rates… [end quote]
The Federal Reserve pays closest attention to the Trimmed Mean PCE Inflation Rate, which fell to 3.64% in October 2023.
The Bureau of Economic Analysis reported that the Personal Consumption Expenditures Price Index fell into a range only a touch higher than the 2% the Fed has been targeting.
Change From Month One Year Ago
November 2023 +2.6%
October 2023 +2.9%
September 2023 +3.4%
August 2023 +3.3%
The tight labor market is very gradually loosening. (Or maybe that’s just noise.)
The good news has produced a tremendous rally in stocks and bonds. SPX had a golden cross in mid-November.
The Treasury yield curve has plummeted along its entire duration (except very short durations which are pegged by the fed funds rate).
The trade is strongly risk-on as stocks and junk bonds are rising faster than Treasury prices, even though Treasury prices are also rising. The Fear & Greed Index is in Extreme Greed.
Gold and silver are rising as the USD is plunging. Oil is stable within its channel. Natgas is dropping.
Although the market is partying, some negatives should bring caution.
The Atlanta Fed’s GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the fourth quarter of 2023 is 2.3 percent on December 22, down from 2.7 percent on December 19. After recent releases from the US Census Bureau, the US Bureau of Economic Analysis, and the National Association of Realtors, the nowcast of fourth-quarter real personal consumption expenditures growth decreased from 3.0 percent to 2.4 percent.
The Conference Board Leading Economic Index® (LEI) for the U.S. declined by 0.5 percent in November 2023. The US LEI continued declining in November, with stock prices making virtually the only positive contribution to the index in the month. Housing and labor market indicators weakened in November, reflecting warning areas for the economy. The Leading Credit Index™ and manufacturing new orders were essentially unchanged, pointing to a lack of economic growth momentum in the near term. Despite the economy’s ongoing resilience—as revealed by the US CEI—and December’s improvement in consumer confidence, the US LEI suggests a downshift of economic activity ahead. As a result, The Conference Board forecasts a short and shallow recession in the first half of 2024.
More notes of caution: the so-called “Magnificent Seven” stocks are driving the rally in the SPX and now represent a ridiculously inflated 30% of its value. The rest of the stock market is stagnant. The CAPE is in bubble territory.
The markets are priced for perfection. The bond market is ignoring the massive Treasury issuance that will be needed in 2024 and beyond.
The METAR for next week is sunny. As always, the METAR is a short-range forecast.