Market Recap – December 22, 2023

Summary:

  • Weekly Returns: The S&P500 had another impressive week returning 53% at Thursday’s close, bringing the S&P500 to a whopping 24.89% return this year. The Dow Jones returned 2.93%, bringing its return to 15.00% on the year. The Russell 2000 (Small Cap) returned 5.60% on the week, bringing its return to 14.42% on the year. Finally, the NASDAQ returned 2.86% on the week, bringing its return to 42.07% on the year. [1]
  • Federal Reserve: The futures markets are currently pricing in seven 25bp rate cuts in 2024, which would bring the Federal Funds rate down from 5.25-5.50% to 3.50-3.75%. However, this is at odds with what the Federal Reserve is They are signaling three 25bp rate cuts in 2024, bringing the final rate at the end of 2024 down to 4.50- 4.75%. [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. The United States announced Operation Prosperity Guardian in response to the attacks, which is a multinational coalition to oppose the Houthi-led attacks. Over 100 container ships have been diverted from the Red Sea, instead opting to go under the Cape of Good Hope. [3]
  • Liquidity: Liquidity in the financial markets continues to improve, specifically in the banking sector. This is due to the draining of the Federal Reserves Reverse Repo Facility (RRP). The mechanism of money market funds taking their money away from the facility and buying short term treasuries increases deposits and reverses in the banking system. Since 2009, this has been a bullish indicator in the markets, and it is one of the driving forces behind the recent rise in equity prices. [4]

Chart of the Week:

Outlook:

  • Debt Burden: The longer interest rates stay high; 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.
  • Real Estate: The real estate market has been relatively frozen since the Federal Reserve raised interest With so many Americans locking in low mortgage rates their desire to sell and buy into a much higher mortgage rate has been extremely low. Lack of liquidity has kept prices high, which has also priced out potential buyers because property values don’t reflect the increase in mortgage rates. This combination has led to a frozen market. As interest rates come down, we expect liquidity to return to the market and the effective mortgage rate of the average to increase because we do not expect interest rates to get to 2020-2021 levels. Therefore, counterintuitively, we expect housing payments to become a larger percentage of consumers disposable income as interest rates fall, which would put a bigger burden on the average household. [5]
  • 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. However, the recent attack by Houthi rebels could signal the beginning of a new supply chain shock, therefore that situation is being monitored closely. There is also the 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. Overall, we see inflation pressures continuing to ease in the first quarter of 2024 and then a rebound in inflationary pressures from both the supply side and demand side starting in Q2. [6]

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. https://fred.stlouisfed.org/series/RRPONTSYD
  5. https://www.usbank.com/investing/financial-perspectives/investing-insights/interest-rates-impact- on-housing-market.html
  6. 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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