Stock Market Update

Gayle Sprute

Vice President
Senior Portfolio Manager

Stocks continued to climb this week, even after the “barnburner” gains from last week. Upbeat investor sentiment was not to be denied even after Wednesday brought a sharp one day sell-off that was largely unexplained but pressured the major domestic indices down by well over 1%. This was the eighth consecutive week of gains for domestic stocks since the lows on October 27th.

Federal Reserve (Fed) members were busy with speeches this week. There are too many to mention but notable comments include: 1) Fed President Goolsbee cautioned it is too early to declare victory against inflation, incoming data will continue to drive policy decisions, and that he is cautiously optimistic about potentially avoiding a recession; 2) Fed President Barkin echoed recent statements from Fed Governor Waller, suggesting the Fed would cut rates if inflation comes down; and 3) Fed President Daly said that rate cuts would be appropriate next year given falling inflation, and that the Fed is cognizant of overtightening, saying even a 75 basis point cut to the Fed Funds rate policy would still be quite restrictive. The flurry of Fedspeak did not alter the market’s expectations for over 150 basis points of rate cuts next year.

Several economic data was released during the week, most coming in better than expected. However, the big news came on Friday. The Fed’s preferred inflation reading, Personal Consumption Expenditures (PCE), came in cooler than expected. The November reading showed that annualized headline PCE declined to 2.6%, while annualized core PCE fell to 3.2%, with both coming in lower than expected. This news fits with the disinflation theme and continues to fuel the narrative that the Fed has room to cut rates.

Friday’s PCE data further confirms the market’s premise since late October that disinflation is gaining momentum. Paired with the assumption that the economy is hanging in there and labor remains steady, inflation is providing flexibility for the Fed to ease. These views have fueled the massive year-end rally. Between October 27th and December 21st, the indices have risen as follows: Dow Jones Industrial Average +15.9%, S&P 500 +15.6%, NASDAQ Composite +18.6%, and Russell 2000 +23.6%. Notably, several stocks have put in their entire year of performance since late October.

Is the market going too far too fast? That is certainly a valid question. The actions of the Fed next year will be a focal point, as will the path of the economy. The market has priced in a soft landing that will not be impacted by the lagged effects of Fed tightening. Additionally, analyst estimates are forecasting 2024 earnings growth of 11.5% for the S&P 500 companies, on 5.5% revenue growth. At a current price/earnings (P/E) multiple of 19.3x forward 12-month estimates (compared with the 10-year average of 17.6x), the market is “priced to perfection” and will not be tolerant if there are “misses” on these or other bullish assumptions.

Updates to the Equities Buy List:

• There are no updates to the Large Cap Equity Strategy Buy List this week.