Category Archives: economy

Current Market Observations

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With so much global unrest and uncertainty hanging over the markets and the Fed clearly on hold for a bit longer with rate cuts, risk assets needed a reason to sell off. We got that last week with Israel’s retaliatory strike on Iran. While the strike seemed limited in scope, the risk of further escalation now hangs over the markets. Oddly, U.S. Treasuries, which typically would rally during global unrest, sold off as the Fed’s position on rates outweighed the troubles in the Middle East. The 10-year U.S. Treasury closed the week at 4.62%, 12 basis points lower than the previous week.  

U.S. Economy 

Interest rates continue to rise as they have all year, and we believe the current elevated rates will remain at this level for quite some time for three simple reasons. First, the economy continues to surprise on the upside with steady growth and expansion. Second, the labor market remains strong, with an unemployment rate near a 50-year low of 3.8% (BLS – Bureau of Labor Statistics). Third, inflation has not reached the Fed’s 2% target and, conversely, could remain above their target for 2024. See Chart 1 below from Apollo showing potential paths for inflation into year-end 2024.  

Policy and Politics 

As the latest escalation settles down, we expect markets to follow suit and settle down as well, but further retaliation from either side would force a flight to safety and quality, and we would expect U.S. Treasuries to rally and yields to fall as a result, so stay tuned!  

In nationwide polls, President Biden and former President Trump are neck and neck. Still, Biden lags by approximately three percentage points in the crucial swing states that could determine the electoral victory. According to Prediction Markets, there is a 55% probability of a Democratic triumph. 

Economic Numbers to Watch This Week 

  • U.S. Durable Goods New Orders MoM for March 2024, prior 1.37% 
  • U.S. Real GDP (Gross Domestic Product) for 1st Quarter 2024, prior 3.4% 
  • U.S. claims for Unemployment Insurance for the week of April 20, 2024, prior to 212,000 
  • U.S. Core PCE (Personal Consumption Expenditures) Price Index YoY for March 2024, prior 2.78% 
  • U.S. PCE Price Index YoY for March 2024, prior 2.45% 
  • U.S. Index of Consumer Sentiment for April 2024, prior 77.90 

Following a strong stock market rally over the last six months, recent weeks have seen a softening trend. Market corrections are typical, and three main drivers of recent volatility have emerged: a reevaluation of Fed rate cut expectations, escalating geopolitical tensions, and ongoing first-quarter earnings season concerns. Despite market adjustments, the extent of the pullback has been contained against a still healthy macroeconomic picture and corporate earnings growth. We remain optimistic as CEO confidence is on the rise, indicating a greater willingness among firms to allocate more capital this year compared to last year. This confidence typically translates into increased hiring and investment in capital expenditures. Please reach out to your advisor at Valley National Financial Advisors with any questions.  

Current Market Observations

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Geopolitical tensions combined with updates on labor markets fueled a volatile week of trading in both stocks and bonds. The Dow Jones Industrial Average fell -2.3% for the week, the S&P 500 Index fell –1.0%, and the NASDAQ fell -0.8%. Energy was the best-performing sector for the week (+2.8%), while Health Care was the worst-performing sector (-3.9%). First-quarter earnings season begins this week with the large-cap banks. JP Morgan, Wells Fargo, and Citigroup will report results this Friday. As the “higher for longer” feeling sunk into the fixed-income markets, traders reacted by selling bonds, and as a result, the 10-year Treasury rose 18 basis points to close the week at 4.39.

U.S. Economy 

Strong economic results raised overall concerns about the Federal Reserve rate cut timeline. The week ended positively with a robust jobs report indicating a healthy labor market, low unemployment, and steady wage growth, easing inflation worries. Despite concern over Fed actions, markets closed with optimism, interpreting the jobs report as a sign of continued economic and corporate growth. We continue to closely monitor the price of oil, which surged to a six-month high on Friday. A sustained upward trend in oil prices could reignite inflationary pressures, complicating Federal Reserve efforts to manage inflation. See the chart below from Trading Economics, which shows Crude Oil prices over the last year. 

Policy and Politics 

Over the weekend, news of the Israeli military’s withdrawal of ground troops from the Gaza Strip sparked optimism. This comes as Egypt offers to host a new round of talks aimed at reaching a ceasefire and hostage release deal. Both Israel and Hamas have agreed to participate. Over the last week, Russian drone attacks in Kharkiv intensified last week, causing casualties and damage. National polls indicate a continued tight race with President Biden and former President Trump neck-and-neck as Democrats claim a significant fundraising lead over Republicans.

Economic Numbers to Watch This Week 

  • U.S. Consumer Price Index for March 2024, prior 0.4% 
  • Minutes of Fed’s March FOMC meeting. 
  • U.S. Producer Price Index for March 2024, prior 0.6% 
  • U.S. Import Price Index for March 2024, prior 0.3% 

Last week, several Federal Reserve presidents provided updates, reinforcing the view that the economy continues to perform well. We look forward to updates from multiple large banking institutions later this week, which should provide valuable data points on the banking industry and economy. As more companies start releasing their earnings in the upcoming weeks, we will be listening for indications of improved sales and earnings growth across a wider spectrum of businesses beyond the dominant mega-cap tech stocks. Geopolitics will continue to be a risk that could derail the otherwise healthy macroeconomic outlook. Please reach out to your advisor at Valley National Financial Advisors with any questions. 

Current Market Observations

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Markets were mixed on a holiday-shortened trading week, with the Dow Jones Industrial Average rising 0.8%, the S&P 500 Index increasing by 0.4%, and the NASDAQ falling -0.3%. Utilities were the best-performing sector for the week (+2.9%), while information technology was the worst-performing sector (-1.3%). Oil prices continued to move higher, finishing the week with a 3.2% gain. Friday saw the Fed’s preferred gauge for inflation, the Personal Consumption Expenditure Index, rise 0.3% (excluding food & energy), matching economists’ expectations. The 10-year Treasury saw continued buying last week, pushing yields down four bps for the week, finishing at 4.21%.

U.S. Economy 

Although last week was a quiet week for economic releases, on Friday, we saw the Federal Reserve’s preferred gauge of inflation, U.S. Core Monthly and Yearly PCE (Personal Consumption Expenditures) for February, and both measures were lower, signaling that inflation continues to fall, see Chart 1 below from Valley National Financial Advisors and Y Charts shows U.S. Core Monthly and Yearly PCE for five years. Federal Reserve Bank Chairman Jerome Powell has stated very clearly that they are watching the inflation data and will be data-dependent in terms of rate movements. The current Fed has been the most transparent we can remember regarding interest rate movements, which is why we do not expect any rate cuts until well into the second half of 2024, and even then, those movements in rates, if any, will be mild and data dependent.

This week, we will see numbers for new payrolls and unemployment insurance for March 2024, and companies will start to prepare for 1st Q EPS reports. Otherwise, we will have a quiet week regarding economic releases.  

Policy and Politics 

Last week saw a holiday-shortened week for Washington, with Good Friday on March 29th. Elevated geopolitical tensions persist amid the ongoing conflicts in the Middle East and the Russia-Ukraine war. U.S.-China trade tensions continue to be elevated with recent news of China’s oversupply of solar energy, electric vehicles, and lithium-ion batteries impacting U.S. producers. President Biden trails former President Trump by around two points in national polling and around three points in swing states. Prediction markets show roughly even odds of a Democratic or Republican win.

Economic Numbers to Watch This Week 

  • U.S. ISM manufacturing for March 2024, prior to 47.8 
  • U.S. Factory Orders for February 2024, prior –3.6% 
  • U.S. Job Openings for February 2024, prior to 8.9 million 
  • U.S. ADP Employment for March 2024, prior 140,000 
  • U.S. ISM Services for March 2024, prior 52.6 
  • U.S. Employment Report for March 2024 
    • Nonfarm payrolls, prior 275,000 
    • Unemployment rate prior 3.9% 

Updates from Federal Reserve Board Members continue highlighting lower inflation readings, improved outlook for GDP growth in coming quarters, and healthy job growth. Markets appear to be warming to the idea that stronger growth for longer is preferred over lower rates. We are encouraged by signs of housing supply improvement, which should help this year’s spring selling season. As earnings season kicks off in the coming weeks, we will be listening to any signs of economic softness communicated by corporate management teams. We continue to monitor geopolitical risks for signs of increased tension and spillover into new areas. Please reach out to your advisor at Valley National Financial Advisors with any questions. 

Current Market Observations

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Last week, the Federal Reserve’s more dovish tone was well received by the markets. The Dow Jones Industrial Average rose 2.0%, the S&P 500 Index rose 2.3%, and the NASDAQ rose 2.9%. Communication services were the best-performing sector for the week (+3.9%), while healthcare was the worst-performing sector (+0.5%). The CBOE Volatility Index fell about 9% for the week, indicating greater confidence and calmness among investors (See Chart 1 below). The latter part of the week saw market participation broadening beyond mega-cap stocks, with small and mid-cap stocks performing well. With the Fed’s rate outlook intact, the 10-year treasury saw increased buying, pushing yields down 12 basis points for the week. 

U.S. Economy 

As mentioned above, the CBOE Volatility Index fell again last week. The index measures the implied expected volatility of the U.S. stock market. VIX (Volatility Index) is used as a barometer for fearful and uncertain markets. The VIX tends to increase when the market decreases and vice versa. During the financial crisis in 2008-2009, the VIX reached as high as 80.86. See Chart 1 below from Valley National Financial Advisors and Y Charts shows the VIX over 5 years.

The FOMC meeting went as expected, with Chairman Powell stating that the current path for rate cuts remains on track, and they plan on up to three rate cuts by year-end 2024. Just as important as the rate cut story, the FOMC announced an increase in their projections for economic growth in 2024 from 1.4% to 2.1%, thus cementing the so-called “soft-landing” scenario. Specifically, Chairman Powell noted, “The economy is strong, the labor market is strong, and inflation has come way down.” Lastly, Powell mentioned that it was appropriate for the Fed to slow the pace of its balance sheet reduction program, which has been another source of restrictive monetary policy. 

Thursday saw 118 new 52-week highs for the S&P 500, the newest highs in 3 years. The prior 13 times this number of 52-week highs was reached resulted in higher stocks one year out 13 out of 13 times, with the average return being 12%, see Chart 2 below from the Carson Institute. 

Policy and Politics 

Global turmoil escalated last week with an ISIS-linked terrorist attack in Moscow shortly after Vladimir Putin was reelected to another six-year term. Further, the Ukraine/Russia and Israel/Hamas wars are showing no signs of ending. In Washington DC, President Biden signed a $1.2 trillion spending package that was previously passed by the U.S. House and U.S. Senate, thus narrowly avoiding an embarrassing government shutdown. With this out of the way for Washington, DC, we will move heavily into the 2024 campaign season with both political parties (Democrats & Republicans) vying for wins in November.   

Economic Numbers to Watch This Week 

  • U.S. Durable Goods New Orders MoM for Feb 2024, prior –6.11% 
  • U.S. Initial Claims for Unemployment Insurance for the week of March 23, 2024, prior 210,000 
  • U.S. Real GDP (Gross Domestic Product) QoQ for Q$ 2023 (Revised), prior 3.20% 
  • U.S. Index of Consumer Sentiment for March 2024, prior to 76.50.
  • 30-year Mortgage Rate for the week of March 28, 2024, prior to 6.87% 
  • U.S. Core PCE (Personal Consumption Expenditures) Prince Index YoY for Feb 2024, prior 2.85% 

Last week, several encouraging signs for the economy and markets were observed. The Federal Reserve left rates unchanged at their Wednesday meeting while upgrading their GDP growth projections and highlighting the strength and resilience of labor markets. Despite a recent blip in inflation readings, the trend lower appears intact, and the Fed continues to see three rate cuts coming later this year. Lower rates will serve as a tailwind to the housing market, which reported improved existing home sales last week. Despite these encouraging signs, we remain focused on identifying emerging market risk areas. We will continue to look for investment opportunities where the risk vs reward tradeoff looks the most compelling. Please reach out to your advisor at Valley National Financial Advisors with any questions. 

Current Market Observations

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Equity markets were down last week, with all three major indexes reporting negative results. The S&P 500 Index fell –0.26%, the NASDAQ -1.17%, and the Dow Jones Industrial Average –0.93%. Fixed income markets saw lower yields last week as Fed Chair Powell gave an indication that rate cuts are “not far” off. Also impacting rates was the February jobs number, which showed lower wage pressure and revisions lower than the hot January jobs numbers. A big test for bond markets will come later this week when the CPI (Consumer Price Index) and PPI (Producer Price Index) numbers are reported for January. The 10-year U.S. Treasury bond yield fell 9.4 basis points last week to close at 4.09%.

U.S. Economy 

The February jobs report from Friday indicates job growth remains healthy, with nonfarm payrolls increasing 275,000 jobs, above consensus expectations for a rise of 198,000. This follows a downwardly revised 229,000 increase in January. Despite encouraging headline figures, prior estimates of job expansion in December and January were revised down to 167,000 jobs. The unemployment rate rose to a two-year high of 3.9%, and wage momentum cooled, indicating less inflationary pressure.

Policy and Politics 

During testimony last week, Fed Chair Powell indicated a softening of banking rules, specifically stating that proposed new rules to force lenders to strengthen their balance sheets (Basel III) would be scaled back or reworked. This comes in response to complaints from industry leaders about the overall cost and economic impact of enacting the original proposed changes. 

What to Watch This Week 

  • U.S. Consumer Price Index released 3/12/24, prior +0.3% 
  • U.S. Retail Sales released 3/14/24, prior –0.8% 
  • U.S. Producer Price Index released 3/14/24, prior +0.3% 
  • U.S. Consumer Sentiment (prelim) released 3/14/24, prior 76.9% 

In the current market landscape, the stock market and the broader economy demonstrate robust performance buoyed by several factors. Healthy corporate earnings bolstered by resilient consumer spending, economic productivity gains, and increased business technology spending are driving equities to continued new highs. Additionally, recent data pointing to a soft landing for the economy continues to provide a supportive backdrop, instilling confidence among investors. With a healthy labor market combined with the prospects for lower rates later this year, the overall economic and market outlook remains optimistic. It should provide help to the housing market. However, prudent risk management and close monitoring of potential inflationary pressures, geopolitical tensions, and trade disputes remain essential. Overall, the positive momentum in both the stock market and the economy reflects a favorable environment for investors.

In navigating volatile markets, it is important to maintain a long-term perspective grounded in the fundamentals of the economy and industry-leading companies. While short-term fluctuations and unforeseen challenges may arise, staying committed to well-thought-out investment strategies is key. As we move forward, let us remain optimistic about the future and recognize that overly emotional markets often pave the way for opportunities and growth.

Current Market Observations

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By: Chief Investment Officer, William Henderson

Equity markets were mixed last week, with two of the three major indexes reporting positive results and only the Dow Jones Industrial Average falling for the week. The S&P 500 Index rose +0.95%, the NASDAQ rose +1.74%, while the Dow Jones Industrial Average fell –0.11%. Critically important to a needed broadening in equity returns, the Russell 2000 Index of Small Capitalization stocks rose +3.00%. We do not typically report on the Russell 2000, but this week’s move higher has put some breadth into the market rather than keeping returns concentrated in the “Magnificent 7.” Concentrated markets tend to rise and fall quickly and are usually based on a small piece of information rather than sound fundamentals. Fixed-income markets were quiet last week as traders and markets have accepted that interest rate cuts by the Federal Reserve are further off than previously thought. The 10-year U.S. Treasury bond yield fell seven basis points to close the week at 4.19%.

U.S. Economy 

Last week’s inflation data showed that prices on consumer goods continue to fall. See Chart 1 from Valley National Financial Advisors and Y Charts showing U.S. Core PCE (Personal Consumption Expenditures) and US PCE YoY. The recent U.S. Core reading is at 2.85%, compared with 2.94% last month and 4.90% last year. This recent reading is lower than the long-term average of 3.24%. While the U.S. Inflation Rate is currently at 3.09%, below the Fed’s target of 2.00%, Fed Chairman Jay Powell has stated that interest rates could move before the inflation rate reaches their target. A Fed pivot (moving from raising rates to cutting rates) will help broaden out equity returns beyond the “Magnificent 7” because small-cap and mid-cap U.S. companies tend to be more interest rate sensitive than large-cap companies.

Corporate profits continue to be strong, and forward-looking estimates suggest we will see profit growth over the next year. Thus far, 90% of S&P 500 Index companies have reported 4th quarter earnings, and according to Bloomberg, revenue growth was +3.8%, while earnings growth was a healthy +7.5%. While much of the growth was attributable to the “Magnificent 7,” if the Fed does eventually pivot on interest rates (we expect not until the second half of 2024), cyclical sectors of the economy will benefit. Thus, economic growth will continue at a robust pace.

Policy and Politics 

March 5th is Super Tuesday, with 15 U.S. states holding primaries on the same day. We expect that the 2024 U.S. presidential primary race will be determined after this date, and whether we have Trump v Biden or Haley v Biden, the next 8+ months will be chock full of the nonsense that sadly surrounds major U.S. elections these days. In the meantime, lawmakers have reached a tentative agreement (to be voted on this week) to fund the government, thereby avoiding another embarrassing shutdown.

We continue to watch the saga playing out with New York Community Bank, where last week they restated their previous earnings results and disclosed potential “weaknesses in internal accounting practices” (emphasis ours!). Banks can be fragile places because confidence in management means confidence in where one places their money for safekeeping. We are confident that the Federal Reserve Bank, the FDIC, and the Treasury know NYCB’s problems and will provide needed guidance and assistance.   

What to Watch This Week 

  • U.S. Job Openings: Total Nonfarm, released 3/6/24, prior 9.026M 
  • U.S. Initial Claims for Unemployment Ins. for the week of 3/2/24, released 3/7/24, prior 215.000. 
  • U.S. Labor Force Participation Rate for Feb 2024, released 3/8/24, prior 62.5% 
  • U.S. Unemployment Rate for Feb 2024, released 3/8/24, prior 3.7%  

Market volatility remains sanguine, and other than the potential for a government shutdown, news from Washington DC has been muted. Global turmoil exists with Israel/Hamas and Ukraine/Russia, but true market volatility is muted. See Chart 2 below from Valley National Financial Advisors and Y Charts showing the VIX or Volatility Index. The VIX is at 13.40, well below the long-term average of 19.11. Our view on this data point is that true risks to the market, like higher interest rates and a major U.S. economic slowdown or disruption, remain on the sidelines, allowing markets to trade on their own merits. 

Among the noise and news, markets continue to set new all-time highs as they efficiently filter out the noise. Low volatility, remaining fiscal stimulus from previous years’ bills (CHIPs Act or Inflation Reduction Act), and growing corporate earnings create real tailwinds for equities. If we get a Fed pivot on interest rates in the second half of 2024, further tailwinds will emerge. It is hard to find unwelcome news these days, but we will keep looking! Reach out to your advisor at Valley National Financial Advisors for help or questions.

Current Market Observations

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By: Chief Investment Officer, William Henderson

The shortened President’s Day Holiday week, with few economic news releases, allowed for one story to dominate the news and, therefore, market returns for the week. That story was AI (Artificial Intelligence) chip maker Nvidia’s (NVDA) 4th quarter EPS release, which showed the “Magnificent 7” member besting Wall Street analysts’ expectations for revenues and earnings. NVDA stock increased by +8.5%, adding $277 billion in market cap and notching a one-day Wall Street record. All major market indexes followed suit and ended the week higher: Dow Jones Industrial Average +0.9%, the S&P 500 Index +1.2%, and the NASDAQ +0.6%. An area of weakness in the stock market continues to be small capitalization stocks, which continue to lag the overall market. Fixed-income markets continue to push off any thoughts of rate cuts by the Federal Reserve before the second half of 2024. The 10-year U.S. Treasury bond yield fell four basis points to close the week at 4.26%.

U.S. Economy 

It was a quiet week for economic releases. This week, we get the revised 4th quarter US GDP (Gross Domestic Product), which will be closely watched for upward revisions from the current +3.3%. Further, the February 2024 Index for Consumer Sentiment will be released, and the question will be whether consumer confidence moves higher yet again. Minutes from the January 2024 FOMC (Federal Open Market Committee) meeting confirmed what we have been saying for quite some time, that interest rate policy will remain data-dependent. Policymakers further stated that they continue to see risks of continued price stability.

Policy and Politics 

Of course, 2024 is a US presidential election year, and Saturday showed former President Trump beating former South Carolina Governor Nikki Haley in the South Carolina GOP primary. While the race for the GOP candidate is not over, it is getting narrowed down, but we will know who the GOP candidate is on Super Tuesday (March 5). 

Globally, politics and policy remain troubled as there is no end in sight for either Ukraine/Russia or Israel/Hamas.

What to Watch This Week 

  • U.S. Real GDP (Quarter over Quarter) for Q4 2023, released 2/28/24, prior 3.30% 
  • U.S. Core PCE (Personal Consumption Expenditures) Price Index for January ‘24, released 2/29/24, prior 2.93% 
  • U.S. Initial Claims for Unemployment Insurance for week of Feb 24, 2024, released 2/29/24, prior 201,000. 
  • U.S. Index of Consumer Sentiment for Feb 2024, released 3/1/24, prior 79.60. 

Anytime a single stock’s action moves the markets, such as Nvidia did last week, we realize how thin the markets are and how starved for news and events Wall Street traders are. Certainly, the NVDA news was big, and adding a $277 billion market cap was a new record, but shouldn’t the real story be the economy? The U.S. economy continues to confound all the experts as it grows and adds employees each week. After 90% of S&P 500 companies have reported 4th quarter earnings, we see a healthy 7.5% earnings growth. We will be intrigued this week as new 4th Q GDP data and the important measure of consumer confidence will be released. Market focus will soon move to the March FOMC meeting and whether there will be any change in monetary policy. Reach out to your advisor at Valley National Financial Advisors for help or questions.

Current Market Observations

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By: Chief Investment Officer, William Henderson

The verdict is still out on which city is happier at this point: Kansas City for clinching another Super Bowl victory or Wall Street for closing the S&P 500 Index over 5,000 for the first time in history. Given the historic volatility offered up by Wall Street, we would take the permanence of the Super Bowl victory. However, last week proved to be another winning week for the markets, with each major market index closing higher. The Dow Jones Industrial Average was barely higher by +0.04%, while the S&P 500 Index was +1.37% and the NASDAQ higher by +2.44%. Keeping with the Super Bowl theme here, equity markets seem much more content thinking about wins than losses, and the thoughts of a recession have now moved to the way back burner. Readers of The Weekly Commentary know we have believed in the strength of the US economy for well over a year now and still believe we are in a growth phase, albeit potentially trending downward, but slowly. Fixed income markets performed poorly last week, with the 10-year U.S. Treasury bond yield increasing by 14 basis points to 4.17%.

U.S. Economy 

As mentioned above, the S&P 500 Index, widely understood to be a fair gauge of large capitalization stocks, closed above 5,000 for the first time in history. This is important because it truly shows the strength and resilience of the U.S. economy. See Chart 1 below from Valley National Financial Advisors and Y Charts showing the S&P 500 Index and the U.S. Gross Domestic Product since 1940. Market prognosticators and experts love to talk about the “Wall of Worry” or “the coming recession,” neither of which really matters over the long term, as you can see from the chart. The U.S. consumer, who continues to be gainfully employed, spends prolifically and churns out massive economic activity as a result. Our economy is consumer-driven, and overall, consumers are healthy, cash-rich, eager to spend, shop, and travel. If Punxsutawney Phil is correct and spring comes soon, we should continue to see healthy economic activity in the U.S.

Patrick Mahomes was the Super Bowl LVIII MVP, but the Wall Street MVP is the U.S. Consumer.

Policy and Politics 

Washington seems content to flounder and argue rather than pass any meaningful legislation regarding the border crisis or additional aid to Ukraine or Israel. With the presidential election starting to take center stage, we believe Washington will be less likely to pass anything not directly tied to the important government funding bill coming in March. Meanwhile, Fed Chairman Jay Powell is marching to his own drum chorus and staying put on rate cuts at least through March 2024. All the main Fed speakers that were out last week parroted Chairman Powell’s message: “We need to see inflation come down a bit more to make sure we are not cutting rates too soon.” This week, we will see important inflation data that will give the FOMC (Federal Open Market Committee) their sought-after data.

What to Watch This Week 

  • U.S. Core Consumer Price Index YoY for Jan ’24, released 2/13/24, prior 3.90% 
  • U.S. Inflation Rate for Jan ’24, release 2/13/24, prior 3.35% 
  • U.S. Job Openings Total Nonfarm for Jan ’24, release 2/14/24, prior 9.026M 
  • U.S. Core Producer Price Index YoY for Jan ’24, released 2/16/24, prior 1.76% 

New records are reached every year whether in sports, industry, or Wall Street. We love to see records broken as much as the next person, but the real story is the one where investors stick to their long-term investment plan thereby building truly generational wealth. There are plenty of reasons to expect equity markets to grow this year but there are always risks. Risk drives returns, and the management of risk over prolonged periods increases returns. The goal of a true investor is to increase returns while managing and limiting risk. Reach out to your financial advisor at Valley National Financial Advisors for assistance. 

Current Market Observations

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Equity markets ended last week by setting new all-time high records for the Dow Jones Industrial Average (+0.41%) and the S&P 500 Index (+1.25%), while the NASDAQ notched another winning week as well (+2.28%). Last week, the modest but record-setting move placed all three indexes in the green on a year-to-date basis (see numbers immediately below). The early slowness we saw in equity markets thus far in January resulted from investors and markets accurately resetting the timing and pace of the coming Fed rate cuts. At the end of 2024, futures markets were pricing in Fed rate cuts (often deemed positive actions for equity markets) as soon as March 2024. We have said previously, and stick to the conviction, that March was too soon and the likely path to lower Fed Funds Rates would be closer to June 2024. Futures markets have moved from a 100% chance of a cut in March to a 50% chance, which we believe is more accurate as inflation still has a bit more cooling to do before it settles around 2.00%. Interest rates increased last week, with the 10-year U.S. Treasury rising 19 basis points to 4.15%. Some strong economic data was released last week, including 4th quarter retail sales and consumer sentiment, which we will detail below.

U.S. Economy 

As mentioned above, U.S. Retail & Food Service Sales jumped +0.55% for December 2023, up from +0.35% for November 2023 and above the long-term average of +0.40%. This was confirmation that the year-end holiday shopping season was strong and, importantly, shows that consumers are not yet too tired to continue fueling the growing U.S. Economy. On the heels of that news, the U.S. Index of Consumer Sentiment, as the University of Michigan reported, jumped to 78.8, well off the recent low of 50.0 set in 2023. See Chart 1 below from Valley National Financial Advisors and Y Charts. It is important to note that a rising consumer sentiment index shows increased consumer confidence, which is generally evident in economic expansionary periods. While not the only predictor of future economic growth, this measure tells us what the consumer thinks about the future. This week, we will see real economic data when the 4th quarter of 2023 GDP is released. Additionally, we continue to monitor corporate earnings releases, which thus far have beaten, frequently softer, Wall Street analysts’ expectations.

Policy and Politics 

In positive news, the U.S. has avoided an embarrassing government shutdown as the dueling parties finally reached a budget deal. This week is the New Hampshire primary, where we get further indications of the presidential candidates for U.S. President in November 2024. While it is a foregone conclusion that President Biden will be the Democratic candidate, with Florida Governor Ron DeSantis dropping out, we are down to Nikki Haley and former President Donald Trump on the Republican ticket. All we have to say in this regard is that drama will follow. Markets are efficient, but politics are not. Stay tuned because as we move into the South Carolina primary and Super Tuesday in March, the final presidential battle will be formed.

What to Watch This Week 

• U.S. Durable Goods Monthly Orders for Dec 2023, released 1/25, prior 5.39%
• 30-year US Mortgage rate for week of Jan 25, released 1/25, prior rate 6.60%
• U.S. Initial Claims for Unemployment Insurance for week of Jan 20 released 1/25, prior 203,250.
• U.S. Core PCE Price Index for Dec 2023, release 1/26, prior 3.16%
• U.S. Real GDP for 4th Quarter 2023, released 1/26, prior 4.90%

It is not news to The Weekly Commentary readers that the U.S. economy is ~70% consumption-based, meaning U.S. Consumers drive the largest part of the U.S. economic growth. Consumer sentiment is rising, and U.S. unemployment remains at historic low levels (3.6%). This is a simple equation – Americans are working, feel good about the economy, and will continue to spend. However, globally, turmoil and unrest abound. China continues to founder and is struggling to reach government-invented GDP targets. A brief look at headlines from the Middle East drums up issues that have lasted 75+ years with no end in sight for the Israel/Hamas War. The conflict has bubbled over into Iran, Yemen, and Lebanon and has impacted Red Sea commerce. The Russia/Ukraine War will soon move into its 3rd year, with no end in sight. While it is easy to see the U.S. as an island and immune to the World’s problems, our involvement with every conflict is usually inevitable. We expect markets to underprice the global turmoil and focus instead on eventual Fed rate cuts in 2024 as inflation moves closer to the Fed’s target of 2.00%. Corporate earnings growth in 2024 remains important, and we expect technology to remain the driver of growth and expansion this year. Expect volatility all year – but every year brings volatility, as we all know by now. Please reach out to your advisor at Valley National Financial Advisors for assistance.

Current Market Observations

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Last week continued the month-long rally we have witnessed across all markets and sectors, with the Dow Jones Industrial Average adding +1.3%, the S&P 500 Index adding +1.1%, and the NASDAQ adding +1.0%. Year-to-date returns also remain healthy across all market indexes (see figures below). Small-capitalization stocks, which have been absent all year, added another +1.9% last week, bringing the year-to-date returns to +4.1%. We point this out as a needed broadening in the 2023 stock market rally to sectors beyond the “Magnificent 7” mega-cap tech stocks into small-cap and industrial names. The month-long stock market rally has been predicated on three issues: softening inflation data, positive earnings releases from U.S. corporations, and a widespread belief that the Federal Reserve is done raising interest rates. The 10-year U.S. Treasury bond closed the week at 4.47%, three basis points higher than last week’s close. 

Global Economy 

While global unrest and turmoil continue with the Russia/Ukraine and Israel/Hamas war, both conflicts remain regional and have not yet spilled over into 1) a greater European region or 2) the larger Middle East, as #1 could impact oil, natural gas, and food prices and #2 could impact oil prices. Both situations remain horrible humanitarian events and will eventually garner sufficient international pressure to resolve the conflicts. As mentioned, the impact on oil prices from either conflict has been minimal, at least since the initial spike in March 2022. Oil is a key ingredient in many industrial and consumer materials well beyond simply energy. A falling oil price goes a long way in the continued inflation fight. See Chart 1 below from Valley National Financial Advisors and Y Charts showing the price of a barrel of oil.

Global and US Policy and Politics 

U.S. politics have reached their yearly quiet period where lawmakers, having passed budget resolutions until early 2024, return to their home states and families for the holidays. Politics are not so sanguine in China, where profit growth is slowing in their industrial sector even as greater housing stimulus continues. According to the Chinese National Bureau of Statistics, industrial profits increased by +2.7% in October from 2022, versus increases of +11.9% in September and +17.2% in August. China is the world’s second-largest economy and remains important to the U.S. and elsewhere.

What to Watch 

  • U.S. Real GDP (Gross Domestic Product) QoQ (Quarter Over Quarter) for Q3 2023, released 11/29, prior rate 4.9% 
  • U.S. Core PCE (Personal Consumption Expenditure) Price Index YoY (Year Over Year) for October 2023, released 11/30, prior rate 3.68% 
  • U.S. PCE Price Index YoY for October 2023, released 11/30, prior rate 3.44% 
  • U.S. Initial Claims for Unemployment for week of 11/25/23, released 11/30, prior 209,000.

We had a quiet, holiday-shortened week last week, but the markets continued their November rally with all major sectors participating. Early thoughts from retailers are that Black Friday sales were strong, and early Cyber Monday sales look to be strong as well. Is this the start of the “Santa Claus Rally?” As readers of The Weekly Commentary know, we do not invest in short-term rallies or bank on Santa Claus for market returns. We preach the importance of long-term investing, ignoring the noise from Wall Street, and sticking to your investment plan; any help from Santa is just gravy for investors. There are few