Market Update – December 15th, 2023
Author: Joe Maas, CIO SPG Advisors LLC
Friday, December 15th
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.
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.
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.
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%.
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.
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.
In closing, we want to express our sincere gratitude to our valued readers and loyal customers for entrusting us with your financial well-being. Your continued support is the cornerstone of our success, and we are committed to serving you with the utmost dedication and professionalism.
As we navigate the ever-changing financial landscape together, we encourage you to reach out to us if there have been any shifts in your risk tolerance or if you have experienced any material changes in your Investment Policy Statement objectives or constraints. Your financial goals are our top priority, and we are here to adapt and tailor our strategies to align with your evolving needs, whether they pertain to risk and return objectives or constraints such as time horizon, taxes, liquidity needs, legal issues, unique circumstances, or changes in your financial planning and retirement objectives. Your feedback and communication are essential in helping us ensure your financial success. Thank you once again for your trust and partnership with Synergy Asset Management. We look forward to continuing this journey together.
We appreciate your continued trust.
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.
Ready to Take The Next Step?
For more information about any of our products and services, schedule a meeting today or register to attend a seminar.