Market Update – January 19th, 2024

Author:  Joe Maas, CIO SPG Advisors LLC

January 19th, 2024

Financial Markets
In this past shortened week, equities were mixed, as hot retail sales data concerned investors that the Fed may not be ready to cut rates in March as originally expected. As of close on Thursday, January 18th, the Nasdaq Composite gained +0.55%, the S&P 500 lost a slight -0.06%, the Dow Jones Industrial Average fell -0.33%, and the Barclays Aggregate Bond Index fell -1.11% for the week.

Market News
NY Empire State Index. A regional index that tracks a monthly survey of manufacturers in New York state, the NY Empire State Index, fell sharply below expectations. Analyst consensus estimated the index would clock in near a positive 18.8, however the index came in at -43.7, a difference of 62.5. This drop in the index was led by a drop in the new orders index and the shipments index, both falling significantly in the last month. Regional data points like this often turn out to be anomalies or smaller regional contractions, however this large difference between expectations and the actual data raises concerns should other data continue to follow this path.

Source: Federal Reserve Bank of New York

Strong December Retail Sales. Stocks slipped on Wednesday, January 17th as stronger than expected retail sales data for the month of December pushed back the probability of a rate cut in March. December Retail Sales totaled $709.9 billion up 0.6% from the previous month, and up 5.6% above December 2022. The upswing was driven by increased sales in the general merchandise sector, with contributions also coming from the auto category. This strong month of consumer data demonstrates that the economy may be too heated for the Federal Reserve to cut rates yet.

Existing Home Sales. On trend with recent months, December existing home sales slipped -1.0% from November and -6.2% from a year ago, totaling 3.78 million homes sold. The median sales price for an existing home reached $382,600, reflecting a 4.4% increase from December 2022. This growth aligns with more historically typical rates of home appreciation, as opposed to the double-digit gains in home prices we’ve seen in recent years.

January Consumer Sentiment. The University of Michigan’s Consumer Sentiment Index surged 13% this month, reaching its highest level since July 2021 and extending the bullish momentum observed in December. The total increase in sentiment over the past two months stands at an impressive 29%, marking the greatest two-month rise since 1991, when the US was getting out of a recession.

While some of this upward trajectory can be attributed to positivity in the holiday season, it seems that consumers are maintaining a positive outlook amidst elevated prices and higher interest rates. Perhaps the glue to this optimism is the robust labor market, exemplified by initial claims registering well below 200,000 in the past week, despite announcements of continued layoffs at the start of the new year. In any case, we will continue to monitor the state of the consumer, as that will continue to be a key driver in how the economy achieves either a hard or soft landing.

Rate Expectations. With the first FOMC meeting scheduled for February 1st, markets are pricing in just a 2.6% probability (as of January 19th) of a rate cut at this upcoming meeting, although the meeting will be vital to gauging the Fed’s sentiment. Looking ahead, the dynamics have recently shifted for the March meeting, with a more mixed outlook on a rate cut. As of Friday, January 19th, markets are pricing in a probability of 51.3% for a rate cut in March, however this marks a significant decrease from last week’s 81% likelihood, largely related to a higher-than-expected retail sales number this week. For the May meeting, markets are pricing in a hefty 89% probability of at least one rate cut at that point.

Although rate probabilities have pulled back recently, expectations for cuts remain more aggressive than what the Fed suggests. The Fed’s most recent Summary of Economic Projections suggests the median FOMC member expects two or three 25 basis point rate cuts – throughout all of 2024. The convergence of market expectations and Federal Reserve realties could be a major source of turbulence in both equity and fixed income markets in the coming months, and we will be sure to keep our eyes on this phenomenon.

Summary
Equity markets showed mixed results amid concerns that strong retail sales data may delay the anticipated March rate cut by the Federal Reserve. Furthermore, markets reflected this data, with the probability of a cut by the March meeting falling from 81% to just 51.3% in a single week (as of January 19th). The NY Empire State Index fell sharply below expectations and existing home sales in December continued to show lower volumes of homes being sold at modest appreciation rates compared to a year ago. Finally, consumer sentiment surged in January, marking the greatest two-month rise in the index since 1991.

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.

Thank you,
Joseph M. Maas,
CFA, CFP®, ChFC, CLU®, MSFS, CCIM, CVA, ABAR, CM&AA

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.