Market Recap – December 15, 2023

Summary:

  • Weekly Returns: The S&P500 had a fabulous week returning 01% at Thursday’s close, bringing the S&P500 to a whopping 24.81% return this year. The Dow Jones returned 3.13%, bringing its return to 12.37% on the year. Finally, the NASDAQ returned 2.94% on the week, bringing its return to 41.04% on the year. [1]
  • Federal Reserve: Jerome Powell, Federal Reserve Chairman announced they were keeping the federal funds rate steady between 5.25%-5.50% for December. However, he indicated that they were looking at three 25 basis point rate cuts in 2024 due to easing inflationary pressures. [2]
  • Global Trade: Houthi attacks on merchant ships off the coast of Yemen have prompted widespread trade disruption with some of the world’s biggest vessels. These disruptions can have widespread consequences in our globalized economy, potentially causing delays and inflationary pressures. [3]

Chart of the Week:

There’s a gap between what the market is pricing in for interest rate cuts and what the Federal Reserve is forecasting for interest rate cuts.

Outlook:

  • Debt Burden: The longer interest rates stay higher, the more companies and individuals will have to refinance their debt at higher interest rates. The US economy has been relatively resilient to higher interest rates due to so many companies and individuals locking in longer-term low interest rates before the hiking cycle. Based on research does at S&P Capital IQ, the real debt cliff for most firms won’t hit until the period between 2024-2026. Therefore, we could see low profitability firms get priced out of the marketplace if interest rates are still high during that period.
  • Interest Rates: The Federal Reserve has concluded its interest rate hikes for this cycle and is expected to maintain a steady interest rate policy until Q2 of 2024, followed by a gradual decrease. With unemployment coming back stronger than expected, the probability of a fast rate decrease has lowered. There is a current disconnect between what the market is pricing and what the Fed is pricing in as far as interest rate cuts. The divergence in expectations creates opportunity. However, it’s important to acknowledge that a supply-side shock could potentially alter this outlook.
  • Inflation: Inflation and short-term inflation expectations are coming to cycle lows due to higher interest rates, easing of supply chain pressures, and easing of oil prices. We expect this trend to continue through the first half of 2024 unless there is a major supply shock. The combination of the labor markets holding steady, inflation cooling, and interest rates set to come down in 2024, the probability of a goldilocks moment is increasing. However, there is potential that the Fed jumped the gun on declaring victory over inflation in their previous meeting, this could undo some of the work they have done to bring inflation lower. [4]

Sources:

  1. Morningstar Investor
  2. Treasury Yields Rise as Fed Rate-Cut Expectations Ebb After US Jobs Report – Bloomberg
  3. Maersk Tells All Its Container Ships to Pause Red Sea Voyages – Bloomberg
  4. Inflation expectations plunge in closely watched University of Michigan survey (cnbc.com)

Bridge Advisory LLC Disclosures

Bridge Advisory, LLC is an investment adviser registered with the U.S. Securities and Exchange Commission. Investment Advisory Services offered through Bridge Advisory, LLC. Content intended for educational/informational purposes only. Not investment advice, or a recommendation of any security, strategy, or account type. Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Information herein has been obtained from sources believed to be reliable, but Bridge Advisory, LLC. does not warrant its completeness or accuracy; opinions and estimates constitute our judgment as of this date and are subject to change without notice. This newsletter expresses the views of the authors as of the date indicated and such views are subject to change without notice.

By: Nick Colletta, CFA, CAIA

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