Stocks traded higher to start the new year, with the S&P 500, NASDAQ 100, and Dow Jones Industrial Average each setting new all-time highs. In continuation of last year’s trend, the companies with the biggest market caps accounted for a substantial portion of the early-year gains.

In Q4 2023, U.S. GDP expanded at a +3.3% annual pace, a slowdown from Q3’s +4.9% but the second-strongest growth since Q4 2021. The U.S. Bureau of Economic Analysis (BEA) reported this week that the Personal Consumption Expenditures (PCE) price index was up 0.2% for December vs. the 0.1% decline posted in November.

Since March 2022, the Fed has raised rates by a total of 5.25%. With the tightening cycle nearly 20 months old, concerns are growing about a 2024 economic slowdown. We examine several potential catalysts.

In December 2023’s edition of the University of Michigan Survey of Consumers, there was notable development as the percentage of consumers expecting lower interest rates over the next 12 months rose to nearly 30% from 12% the prior month.

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.