Economic Update 12-18-2023 

• Economic data for the week included the Federal Reserve keeping interest rates unchanged, while alluding to easing policy at a further pace than first expected in 2024. Both producer and consumer inflation showed continued signs of some further deceleration. Industrial production and retail sales showed gains, although trends for the latter remain less robust after correcting for inflation. 
• U.S. equities gained with optimism of the U.S. Fed hinting at easier policy, while a weaker dollar buoyed foreign stocks higher. Bonds earned positive returns along with a drop in interest rates. Commodities gained on net, led by metals and energy. 

U.S. stocks experienced gains for the seventh straight week as investors cheered the Federal Reserve’s dot plot, released after the meeting, which alluded to no additional expected rate hikes in addition to four cuts in 2024. This helped reinforce the soft landing case that financial markets had been hoping for, as well as potential for a ‘regime shift’ from tightening to easing. Producer prices also came in lower than expected, improving the case for inflation generally decelerating. 

Nearly all sectors experienced gains last week, led by materials, industrials, financials and consumer discretionary, all up 3-4%, while communications lost a fraction of a percent. Real estate rose nearly 6%, in keeping with the sharp decline in interest rates. Falling rates also powered sentiment for small caps higher, as they again outperformed large cap stocks. This is due to the perception of an ease in credit conditions, as well as a general ‘beta’ effect, with smaller firms having a more volatile nature and greater economic sensitivity generally (in both directions). 

Foreign stocks gained as well, with hopes for lower interest rates globally, especially with weakness in European and British economic data. Interestingly, both the European Central Bank and Bank of England kept interest rates unchanged, along with the U.S. Fed, but the former mentioned that easing wasn’t even discussed at this point, while the latter noted that rates would stay high for an ‘extended period.’ These hawkish stances were unusual in that both central banks oversee economies that are much nearer to recession than the U.S., but also are more sensitive to inflation outbreaks historically. Even more surprising to markets, the central bank of Norway hiked rates by 0.25%, noting persistent inflation pressures. Emerging markets outperformed developed slightly, led by sharp gains in Mexico and South Africa. 

Bonds also fared positively last week, in keeping with lower interest rates. Both investment-grade and high yield gained upwards of 2%, while senior loans rose less than a percent. Foreign bonds outperformed U.S., on an unhedged basis, with falling yields in addition to a sharp drop in the U.S. dollar. The dollar movement appeared to be related to the dovish Fed response, in contrast to the relatively hawkish communications from Europe and the U.K., with relative interest rate levels a driving factor in currency sentiment with all else equal.  

Commodities saw gains across the board generally last week, helped by the weaker dollar. Industrial metals rose several percent, as precious metals and energy gained to a lesser degree. Crude oil rose under a percent last week to $72/barrel, with minimal geopolitical news to move the needle other than weaker European demand growth. 

Period ending 12/15/2023	1 Week %	YTD %
DJIA	2.93	15.00
S&P 500	2.53	24.89
NASDAQ	2.86	42.70
Russell 2000	5.60	14.42
MSCI-EAFE	2.56	15.90
MSCI-EM	2.69	7.23
Bloomberg U.S. Aggregate	2.16	4.88

U.S. Treasury Yields	3 Mo.	2 Yr.	5 Yr.	10 Yr.	30 Yr.
12/31/2022	4.42	4.41	3.99	3.88	3.97
12/8/2023	5.44	4.71	4.24	4.23	4.31
12/15/2023	5.44	4.44	3.91	3.91	4.00

Sources:  LSA Portfolio Analytics, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger’s, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder’s, Standard & Poor’s, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research.  Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends.  Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.                                                                                    

The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness.  All information and opinions expressed are subject to change without notice.  Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product.