Economic Update 1-8-2024

• In the first week of the new year, economic data continued to show a mixed picture. ISM manufacturing continued to contract, but did improve, while ISM services grew, but at a far slower pace. The monthly employment report for December showed gains far stronger than expected. 
• Equities fell back globally to begin the year, resulting from geopolitical tensions and signs the Fed may not cut rates as dramatically and as quickly as hoped. Bonds lost ground, as yields ticked higher, and foreign bonds were hampered by a stronger dollar. Commodities were mixed, with oil up and metals down. 

U.S. stocks began the new year on a sour note, resulting in the first negative week in months. Largely, this was due to rising expectations for rate cuts happening soon perhaps being overdone. Since stocks have moved essentially straight up over the last few weeks, a bit of a pullback wouldn’t be too surprising, which occurred. By Friday, market sentiment pulled back again in response to the stronger-than-expected employment report, which some thought could lower the odds of the Fed cutting rates anytime soon. However, this was offset by an ISM services report coming in at the edge of expansion may have offset that somewhat. Economic data continues to come in showing mixed results, leaving investors without clear direction. 

By sector, defensive health care and utilities saw gains of roughly 2%, followed by energy up a percent along with a rebound in oil prices. Laggards included technology and consumer discretionary, down -4% and -3% respectively, with the former led by a downgrade in Apple shares. Real estate also fell back by -2% as interest rates ticked back higher. Earnings season for Q4 this coming week, with fairly tempered expectations (year-over-year growth for the S&P at just over 1%, per FactSet). This appears to be due to some strength having been pulled forward into Q3, where initial expectations for a slight decline in earnings growth ultimately morphed into near-normal actual growth of 5%. Estimates for 2024 are far better, and seem to reflect either a soft landing scenario, or a quick/minor recession and robust recovery. 

Foreign stocks in both developed and emerging markets lost ground, similarly to domestic stocks, with declines smallest in the U.K. in dollar terms; Japan gained a percent in yen but fell back when converted back to the stronger dollar. Inflation picking up by a half-percent in Europe didn’t help sentiment. As in the U.S., geopolitical concerns appeared to also contribute to the pullback, particularly in emerging markets. This included continued escalation of shipping attacks in the Red Sea—a key route for global commerce—as well as remarks from China in regard to hopes for a reunification with Taiwan. Upcoming elections in Taiwan in about a week are being watched closely, due to opposite philosophical stances on the China relationship—one favors closer Chinese ties, while the other stands on the pro-independence side. 

Bonds fell back by about a percent across the board, as yields ticked higher along with the falling rate cut hopes. Senior bank loans outperformed, with flattish results. Foreign bonds fared worse, as the U.S. dollar rose by over a percent. 

Commodities were mixed last week, with energy seeing gains while metals and agriculture declined. Crude oil prices rose 3% last week to $74/barrel, on the heels of still-rising Middle East tensions in the Red Sea shipping zone. Oil begins the year within its trading range of the past year and a half—roughly between $65 and $85. There are some assumptions that the U.S. would begin to refill the Strategic Petroleum Reserve at the cheaper end of that range, which could provide a bit of a floor to pricing, offsetting any continued weakness from higher supplies and perceived lack of demand as the global economy slows in 2024. 

Period ending 1/5/2024	1 Week %	YTD %
DJIA	-0.56	-0.56
S&P 500	-1.50	-1.50
NASDAQ	-3.23	-3.23
Russell 2000	-3.73	-3.73
MSCI-EAFE	-1.26	-1.26
MSCI-EM	-2.09	-2.09
Bloomberg U.S. Aggregate	-1.20	-1.20

U.S. Treasury Yields	3 Mo.	2 Yr.	5 Yr.	10 Yr.	30 Yr.
12/31/2023	5.40	4.23	3.84	3.88	4.03
1/5/2024	5.47	4.40	4.02	4.05	4.21

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.