Market Recap – December 29, 2023

Summary:

  • Weekly Returns: The S&P500 had a modest week returning 77% at Thursday’s close, bringing the S&P500 to a whopping 25.89% return this year. The Dow Jones returned 0.22%, bringing its return to 15.25% on the year. The Russell 2000 (Small Cap) returned 2.47% on the week, bringing its return to 17.25% on the year. Finally, the NASDAQ returned 1.22% on the week, bringing its return to 44.44% 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%. The first rate cut is expected is expected in March of 2024. [2]
  • Inflation & Defense Spending: Fromer Treasury Secretary Lawrence Summers said investors are probably underestimating inflation risk. “I think there’s still a risk that the market is probably underestimating, that we’re not going to quite make as much progress on inflation as people hope, and that there’s not going to be quite as much room for Fed easing as people hope.” On defense spending Summers said, “The way in which the United States has conceived itself in terms of national security is no longer viable. We are going to have to invest substantially more in all aspects of national security.” Summer’s thesis on inflation and defense spending matches our current outlook, which is consistent with how we are positioning portfolios for 2024. [3]
  • Housing: S. housing starts unexpectedly rose to a 6-month high. New-home construction crushed expectations in November, rising by 1.56 million versus 1.36 million expected. The rise is likely tied to lower mortgage rates, going below 7% after being at a high of 8% earlier this year. This increased activity is positive for the economy after over a year of extremely low housing liquidity. [4]

Chart of the Week:

Source: Beth Kindig, Bloomberg 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.
  • Interest Rates: The current market conditions appear to reflect an anticipation of seven Federal Reserve rate cuts in 2024. However, our analysis suggests that such aggressive monetary easing is unlikely to materialize without the onset of a significant economic downturn. Given our assessment that the probability of a recession in the first half of 2024 remains low, it appears that the market may have overestimated the Federal Reserve’s inclination for rate reductions. Consequently, we have strategically reduced duration exposure in our portfolio. This adjustment is a precautionary measure against potential upward shifts in long-term interest rates, should the Federal Reserve opt for fewer rate cuts than the market currently anticipates. This strategy is aimed at mitigating the risks associated with a possible recalibration of market expectations regarding monetary policy. [5]
  • Geopolitics: In 2024, we anticipate that geopolitical instability will significantly influence global markets, with pronounced impacts on supply chains. The recent Houthi insurgent attacks on merchant vessels in the Red Sea exemplify the onset of such disruptions. Escalating tensions in the Middle East, coupled with Venezuela’s potential military aggression towards Guyana, China’s increasing focus on Taiwan, and the ongoing Russia-Ukraine conflict, collectively signal a heightened risk of geopolitical turmoil. This environment is expected to lead to substantial, asymmetrical risks to global supply chains, potentially exacerbating inflationary pressures within the economic system. These dynamics underscore the importance of closely monitoring geopolitical developments, as they are likely to be a critical determinant of market behavior and supply chain integrity in the coming year. [6]

Sources:

  1. Morningstar Investor
  2. Treasury Yields Rise as Fed Rate-Cut Expectations Ebb After US Jobs Report – Bloomberg
  3. Summers Says Investors Probably Underestimating Inflation Risk – Bloomberg
  4. https://fred.stlouisfed.org/series/RRPONTSYD
  5. CME FedWatch Tool – CME Group
  6. A Cold War Era Dispute Between Venezuela and Guyana Complicates S. Relations – The New York Times (nytimes.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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