The US stock market is entering the final trading week of 2023 and the whole story is coming together.
Inflation data released Friday showed the Federal Reserve inching closer to its goal of getting inflation back to 2%, putting the central bank on track to cut interest rates.
Signs of a recession remain isolated. Interest rates have moderated from their more than decade highs reached this fall. The Dow Jones Industrial Average (^DJI) and the S&P 500 (^GSPC) are close to record highs. And the Nasdaq Composite (^IXIC) is up over 40% this year.
Next week, the question of whether the stock market's recovery leads to a record for the S&P 500 – the Dow hit a record last week – may be the biggest drama for investors this week, given a weak stimulus plan and poor earnings picture.
Tuesday morning's housing price data and Thursday's initial jobless claims report will be the main economic updates on the schedule. Large companies are not expected to report profits.
The markets will be closed on Monday for Christmas.
Stocks have gained across the board this year, with the S&P 500 and Dow nearing record highs to end the year.
Inflation is approaching the Fed target
On Friday, inflation data showed the Fed took a decisive step toward bringing inflation back to its 2% target.
The personal consumption expenditures price index showed prices on a “core” basis, which excludes food and energy and is the Fed's preferred measure of inflation, rose 3.2% in November from a year earlier. This was the slowest annual increase since April 2021.
However, a closer look at this data shows that the central bank has more or less achieved its goal.
On an annual basis, the “core” PCE was six months 1.9% in November.
“This week there was a renewed attempt by some Fed officials to defy market expectations for rate cuts, but with core PCE inflation running below 2% on an annual basis over the past six months, this is in this latest wave of hawkishness “Not the case.” “Fooling everyone,” Andrew Hunter, deputy U.S. chief economist at Capital Economics, wrote in a note Friday.
The story goes on
“There are increasing signs that the post-pandemic inflation scare is over and we expect interest rates to be cut significantly next year,” Hunter added.
The Fed's rapid rate cut next year has partly supported the market's recovery in 2023.
And while many investors will remember this year because the AI hype revitalized tech trading after a dismal 2022, the second half of this year was all about interest rates.
An autumnal swoon in the U.S. stock market coincided with a rise in Treasury yields to 16-year highs, as doubts about a slowdown in inflation pressures – and in turn doubts that Fed policy would ease from 22-year highs – weighed on the markets.
Recent data as well as the Fed's forecasts have allayed many of these fears.
US Federal Reserve Chairman Jerome Powell attends a press conference in Washington, DC, USA on December 13, 2023. (Photo by Liu Jie/Xinhua via Getty Images) (Xinhua News Agency via Getty Images)
Looking for 2024
With the stock market reaching record highs by 2023, forecasts for 2024 are already out of date.
Last week, Goldman Sachs' equity strategy team increased its 2024 price target for the S&P 500 from 4,700 to 5,100.
When many on Wall Street began publishing their forecasts for the coming year in mid-November, the market was not yet convinced about the future direction of inflation, the economy and the Fed.
Now we end the year with a broad consensus that inflation will ease, the economy will continue to grow and the Fed will cut interest rates. In other words, a “soft landing” has become the baseline scenario that is driving markets higher.
And as we wrap up two of the more adventurous years in recent market history, the team at Bespoke Investment Group highlighted some market stats on Friday that remind us that history will likely relegate these post-pandemic convulsions to the dustbin.
On November 30, 2023, the S&P 500 closed at 4,567.80. On November 30, 2021, the S&P 500 closed at 4,567.00.
In between, of course, investors endured the S&P 500's worst year in a generation and are poised for the index to have one of its best five years since the financial crisis. But the further we move beyond that two-year period in which stocks “went nowhere,” the less we will remember the drama that filled both moments.
With that in mind, Bespoke noted that during the 2022 selloff, the seven largest stocks by market cap in the S&P 500 lost a combined $4.9 trillion to start the year. This year, the same seven stocks have increased their combined market cap by the same $4.9 trillion.
As 2024 approaches, Wall Street forecasts show that investors will enter the new year with what we call cautious optimism. The S&P 500 gains about 9% per year on average; Most forecasters expect an increase of about 5% next year.
But as Sam Ro, former editor-in-chief of Yahoo Finance and TKer publisher, noted, the stock market rarely has an “average” year. It has been since 1957 The S&P 500 has risen 15% or more 33 times. During the same period, the index lost ground 15 times.
With this in mind, it seems clear that Wall Street is once again wrong about where stocks will move at the end of next year.
But as Bespoke's data makes clear, striving for precision in any given year is a fool's errand anyway – over time the drama of an annual profit or loss will flatten out. And the arc of market history ultimately bends in one direction.
Weekly calendar
Monday
Tuesday
Economic data: FHFA House Price Index, October (+0.5% expected, +0.6% prior); S&P Case-Shiller Home Price Index, Monthly Comparison, October (+0.6% expected; +0.67% previous); Dallas Fed Manufacturing Activity, December (-19.9 previous)
Merits: There are no significant winnings scheduled to be released.
Wednesday
Economic data: Richmond Fed Manufacturing Activity, December (-5 previous)
Merits: There are no significant winnings scheduled to be released.
Thursday
Economic data: Initial jobless claims, week of December 23 (210,000 expected, previously 205,000); Wholesale inventories, November (-0.2% expected, previously -0.4%); Retail inventories, November (+0.2% expected, +0% prior); Pending Home Sales, November (+1% previous, -1.5% previous)
Merits: There are no significant winnings scheduled to be released.
Friday
Economic data: Chicago PMI, December (50.0 expected, 55.8 expected)
Merits: There are no significant winnings scheduled to be released.
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