Economic Update

January 2024 Investor Report 

Published: May 6, 2024Updated: May 6, 2024

The stock market used the end-of-year momentum to generate gains for the year’s first month. The benchmark S&P 500 generated 1.5%, while the Dow Jones Industrial Average and the Nasdaq Composite appreciated 1.15% and 2.7%, respectively. Interest rates on the 10-year United States Treasury fell to 3.92% on the decline of inflation expectations and a further loosening of monetary policy from the Federal Reserve in the coming months. This market is in a very unique state. The S&P 500 is reaching all-time highs while the Russell 2000 is in correction territory (down more than -20% from the highs in 2021). The only time we have seen this discrepancy in performance in modern U.S. financial markets history was in 1999. 

The initial estimate of the 4th quarter Gross Domestic Product (GDP) came in at a strong 3.3% reading. We do warn that this figure will come down in the coming months. We have written about Gross Domestic Income (GDI) before; this sibling metric showed a 0.1% contraction in the 3rd quarter. The Federal Reserve’s Beige Book reported that in December, “A majority of the twelve Federal Reserve Districts reported little or no change in economic activity since the prior Beige Book period.” The November Beige Book report had more regions reporting a decline in economic activity (6 Fed Districts) than regions reporting modest growth (4 Fed Districts). On their earnings call, railroad giant Union Pacific reported a “poor start” to begin the year and said, “the economic environment continues to look muted in 2024, particularly in the first half.” Union Pacific, like most transportation and logistics companies, has a good line of sight on the near-term direction of the economy. Businesses will reach out to Union Pacific ahead of big projects to ensure that Union Pacific can service any investment or growth in business activity. 

Inflation growth rates continue to decrease, putting downward pressure on short and intermediate-term interest rates. Both headline and Core PCE (Personal Consumption Expenditure) fell below 3% for the first time in a couple of years. Each report of lighter inflation increases the odds of a March rate cut. These rate cuts put a tailwind behind long-duration assets like stocks. As we discussed during our 2024 Outlook video call earlier this month, inflation should continue lowering through the spring. The risk, however, is that inflation returns in the second half-year. Several leading inflation indicators (leads by 6-12 months) have bottomed or appreciated in the last few months. These end-of-year inflation risks increase more if the Fed starts cutting rates in March. We do not believe the coast is clear yet for the Federal Reserve to declare victory and smooth sailings. In addition to these inflation risks, the economy is still in the early stages of feeling pressure from higher interest rates. Moody’s recently declared the beginning of a new default cycle a few months ago. Credit is still hard to get as banks tighten lending standards. Borrowing rates are still climbing for small businesses (NFIB December report). In conversations with several real estate-focused bankers, the consensus is that we are in the “third inning” of a broader wave of credit defaults in commercial real estate. On the household front, credit card and auto loan delinquencies continue to trend negatively. These trends are not going to reverse any time soon.

We look forward to what should be a notable year for markets. Several developments that could be catalysts for the next big move have yet to unfold. We appreciate your continued trust and support! Please feel free to reach out to the team with any questions.

Best regards,

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Stash J. Graham

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