Investors on Wall Street have been anticipating a further pronounced easing of inflation. This week, the release of the December Producer Price Index (PPI) and Consumer Price Index (CPI) reports showed inflation running slightly hotter than expected. However, the long-term trend continues to be favorable.

Financial markets underwent a sizeable shift in the fourth quarter. Treasury yields spiked in Q3, reversed lower as inflation eased, and the Federal Reserve hinted at interest rate cuts in 2024. The decline in interest rates was a significant tailwind for stocks and bonds. Here, we will recap the fourth quarter and look ahead to 2024.

As we enter 2024, our indicators signal an improving financial environment. The year-end rally may extend into early January, but potential headwinds loom in 2024 Q1. We believe these headwinds stem from the market's optimistic rate-cut forecast and exuberance rather than an economic slowdown.

The stock market extended its recent rally this week, and investor sentiment continues to be positive, backed by the Federal Reserve Chairman Jerome Powell and the Federal Open Market Committee’s (FOMC) decision to hold the federal funds rate steady at 5.25%-5.50%.

The Federal Reserve has raised interest rates by more than 5% since March 2022. It has been the fastest pace of tightening in decades, but data shows the economy has been resilient thus far. The U.S. economy grew at a 5.2% annualized pace in the third quarter of 2023.

The S&P 500 recorded its biggest monthly gain since July 2022 and currently trades less than 5% below its all-time closing high. The NASDAQ 100 Index gained +10.8% as mega-cap growth stocks such as Microsoft, Apple, and NVIDIA traded toward new all-time highs.

The Leading Economic Index (LEI) declined for the 19th consecutive month in October, the longest streak since the 2008 financial crisis. It was also the LEI's lowest reading since May 2020. While the LEI indicates the growth rate is slowing, the Coincident Economic Index (CEI) continues to trend higher and sits at an all-time high.

The stock market continued to trend higher this week following Tuesday’s release of the Consumer Price Index (CPI), which showed progress on the inflation front. The release of the Producer Price Index (PPI) followed, showing that final consumer demand declined. This progress may allow the Federal Reserve to be less restrictive with monetary policy.

As we approach the end of the year, investors with significant capital gains or losses may consider a tax-loss harvesting strategy. Tax-loss harvesting offers tax advantages, but there are special considerations.

Last week, the U.S. Treasury announced its updated borrowing estimates and projected issuance for the next two quarters as the Fed holds interest rates steady. Meantime, at the halfway point of the third quarter earnings season, nearly 80% of the reporting S&P 500 companies had posted better-than-expected profits.

Navigating this cycle is particularly challenging due to its complexities. While macro historically matters over the long term, markets can diverge from macro in the near term. Seasonality is historically a tailwind when the S&P 500 is up through October, which historically has shown a 90% win rate.

The S&P 500 gained more than 20% through the end of July but has since declined 8.3% over the past three months, bringing its year-to-date gain to 10.6%. A significant factor behind the recent equity market sell-off has been the sharp rise in interest rates.