Market Recap – January 5, 2024

Summary:

  • Weekly Returns: [1]

*US Bond Market is Bloomberg Aggregate Index

*International Stocks is Morningstar Global ex-US Index

  • Interest Rates: Global markets experienced a downturn last week, prompted by traders reassessing the Federal Reserve’s capacity for aggressive interest rate cuts, contrary to earlier expectations. This reassessment led to an increase in long-term interest rates, negatively impacting both stocks and bonds. This decline follows a recent surge in the markets, driven by the drop in the 10-year rate from above 5.0% to below 3.8%, fueled by anticipation of interest rate reductions in 2024.[2]
  • Labor Markets: While the headline job figures appear positive based on the unemployment rate and job gains number, they mask underlying concerns. The labor force participation rate decreased by 0.3%, from 62.8% to 62.5%, effectively removing 845,000 jobs from the market. Had these individuals remained in the workforce, the unemployment rate could have risen to over 4.5%, up from 3.7%. Moreover, there was a significant shift in employment types: full-time positions declined by 1.531 million to 133.2 million, while part-time roles increased by 762,000. Without these part-time jobs compensating for the loss in full-time employment, the unemployment rate might have escalated to approximately 5.2%. Therefore, the current unemployment figure, influenced by a lower labor force participation rate and an increase in part-time work, presents a distorted picture of the job market. [3]

Chart of the Week:

Source: Beth Kindig, Bloomberg Outlook:

  • 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. [4]
  • Inflation: Inflation has seen a notable decline over the past year, falling from a peak of over 9% to just above 3%. Despite this decrease, several factors suggest persistent long- term inflationary risks. These include ongoing government expenditure, rising labor costs that exceed the current inflation rate, and geopolitical tensions disrupting supply chains. In the short term, weaknesses in the labor market, earnings, and consumer spending are leading to cyclical lows in inflation. However, once the current economic slowdown eases, we anticipate a resurgence of inflationary pressures.

Sources:

  1. https://www.morningstar.com/
  2. https://fred.stlouisfed.org/series/DGS10
  3. https://www.bls.gov/news.release/empsit.nr0.htm
  4. Why Venezuela Deployed Troops to Guyana Border (msn.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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