Market Update – December 15th, 2023

Author:  Joe Maas, CIO SPG Advisors LLC

Friday, December 15th

Financial Markets

Markets continued their rally this week on news of disinflation and a dovish Federal Reserve meeting. As of close on Thursday, December 14th, the Dow Jones Industrial Average rose +2.8%, the S&P 500 and Nasdaq Composite rose +2.5%, and the Barclays Aggregate Bond Index rose +2.1% for the week. Notably, on Wednesday, December 13th, the Dow Jones Industrial Average hit an all-time high following the FOMC meeting that afternoon.

Market News

Fed’s Dovish December Meeting. In perhaps the most consequential Fed meeting of 2023, the FOMC’s December meeting came as a dovish surprise as Fed Chair Jerome Powell discontinued the conversation of further rate hikes. In fact, Powell’s comments even indicated that the Fed is discussing the timeline of potential rate cuts in 2024. More specifically, this was Jerome Powell’s answer when a reporter from Bloomberg asked how the Fed will decide to cut rates:

“So we’re aware of the risk that we would hang on too long. We know that that’s a risk, and we’re very focused on not making that mistake.”

Source: The Federal Reserve

Furthermore, the Fed’s Summary of Economic Projections, released four times per year including this December meeting, indicated that the Fed sees inflation coming down faster than they originally expected and higher rates no longer needed for as long as they previously expected. The median Fed Funds rate projection for the end of 2024 put the target Fed Funds rate at just 4.6%, compared to the current range of 5.25-5.5%, accounting for at least three 25 basis point rate cuts. In the infamous dot plot, not one FOMC participant suggested that an additional rate hike would be appropriate.

Source: The Federal Reserve

November CPI. In November, the Headline CPI demonstrated an annual inflation rate of +3.1%, a slight decrease from the previous month’s +3.2%. On the other hand, the annual Core CPI for the same period stood at +4.0%, the same annual pace as October. On a monthly basis, both CPI and Core CPI exhibited modest increases of +0.1% and +0.3%, respectively, on track with economists’ projections. Most importantly from this week’s CPI print, the November CPI closely tracking with expectations was a significant factor in the Fed’s call to discontinue any rate hikes in its Summary of Economic Projections.

Source: BLS

Looking into the drivers of November’s CPI report, Shelter costs increased by +6.5% compared to a year ago, although this inflationary trend appears to be moderating, with rents actually falling in some markets. Transportation services, though a smaller sect of inflation compared to shelter, showed a substantial +10.1% increase from a year ago, also playing a role in higher inflation.

On the other hand, some categories experienced deflation on an annualized basis. A more volatile category, energy costs have decreased by -5.4% from a year ago, led by drops in the cost of gasoline and fuel oil. Similarly, used vehicles saw continued deflation, with a decrease of -3.8% in prices from a year ago. We are encouraged by the latest CPI print but are hopeful for continued disinflation as the Fed approaches their 2% target.

Source: BLS

November PPI. The Headline Producer Price Index recorded a modest annual inflation rate of +0.9%, reflecting a lighter figure compared to October’s +1.2% inflation. The Core PPI, which excludes volatile food and energy prices, showed slightly higher prices with these items taken out, up +2.5% from a year ago. On a monthly basis, the PPI maintained a flat trajectory, while the Core PPI inched up by +0.1% in November.

Examining the components leading inflation for producers, the food category emerged as a significant contributor, experiencing a notable uptick of +0.6% during the month of November compared to October. Conversely, lower energy costs played a role in dampening overall inflationary pressures, with a decline of -1.2% in November. Lower inflation to producers should continue to be a favorable factor in the Fed’s final push to get inflation towards 2%.

Source: BLS

November Retail Sales. Following a weaker month of retail sales in October, the metric climbed in November on stronger holiday spending. The data revealed a month over month uptick of +0.3% in Retail Sales and an increase of +4.1% compared to a year ago. Amidst the festive splurge, the trend in general merchandise sales revealed a contrasting picture, marking its third consecutive month of decline. This pattern suggests an interesting shift in consumer preferences away from traditional “things” as Christmas gifts, signaling evolving trends as consumers continue to increase their spending on services rather than goods.

Summary

This week’s market saw a rally fueled by disinflation and a dovish Federal Reserve meeting, with the Dow Jones hitting an all-time high. The FOMC meeting indicated discussion of a timeline for rate cuts in 2024, projecting a lower-than-expected Fed Funds rate with three rate cuts estimated to occur throughout next year. CPI and PPI data came in as expected and demonstrated continued disinflation in November. November retail sales data also showed strength in spending from consumers, however general merchandise sales did fall for the third month in a row despite the increased holiday spending overall.

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The information contained herein is general in nature. It does not take into account your particular investment objectives, financial situation, or needs. It is provided for illustrative or informational purposes only, and should not be construed as advice. Our advisors can meet with you to discuss your retirement plan.