1. S&P Global U.S. Composite PMI
The S&P Global Composite PMI Output Index is a weighted average of the Manufacturing Output Index and the Services Business Activity Index. The composite index surged to 52.3 on Wednesday from a previous level of 50.9. The strong increase is further evidence of a dynamic and strong U.S. economy. Despite a drop in manufacturing output, services sector activity increased markedly. The report further noted improvement in business confidence, less input cost inflation, and decelerating costs of goods and services.
2. Durable Goods Orders
New orders for manufactured durable goods were unchanged in December 2023. Consensus expectations were for a 1.1% increase. This report was outshined by the Bureau of Economic Analysis’ GDP report which was released on the same day and at the same time.
3. GDP Growth Rate
Expectations were for 2% U.S. economic growth in Q4 2023, but Thursday’s GDP growth rate came in much better than expected at 3.3%. Consumer spending retreated compared to Q3 but still came in at a healthy 2.8%. Consumption of goods was less while spending on services expanded. This report underscores the fact that strong consumer demand kept the U.S. economy going in 2023. Consumers used stockpiled savings from direct payments made during the pandemic and extra cash flow from paused student loan repayment requirements to fuel their 2023 spending. Those sources are drying up; yet consumers now have rising wages to propel continued spending. Look for consumers to continue driving GDP growth in early 2024.
4. Core PCE Price Index
Core PCE prices rose by 0.2%, which was in line with consensus, in December 2023 compared to the previous month. On an annual basis, core PCE came in at 2.9% through December 2023 which is less than an expected 3%. The data are consistent with an underlying disinflationary trend. The personal consumption expenditure (PCE) price index is the U.S. Federal Reserves preferred inflation gauge. This report supports the notion of impending interest rate cuts in the year ahead.
5. Personal Income
Personal income increased 0.3% in December 2023 compared to November; this increase was in line with consensus. The advance is thanks to increases in both compensation and interest income. Compensation advanced 0.4% while interest income spiked by 0.8%.
6. Personal Spending
Personal spending in December 2023 increased by 0.7% compared to November. This entry is the second consecutive increase in personal spending. Consensus called for a 0.4% increase. This report adds substance to the claim that consumers are actively driving the underlying economy.
7. Interest Rate Expectations
The tension between a strong underlying economy, an incentive to equities, and a growing concern about an unhurried Fed rate cutting program, a threat to equities, defines our current economic environment. The Federal Reserve and Jerome Powell have signaled they will make decisions about rates based on macroeconomic data. Meanwhile, many money managers seem to have made a premature bet the Fed will cut rates aggressively throughout 2024 and even begin such rate cuts in March. However, the U.S. economy is humming, and macroeconomic data is strong. Given this ongoing economic strength, the Fed may not find license to aggressively cut rates as many market participants seemed to have expected. As it became clear in the fall of 2023 the Fed had shifted from interest rates increase to interest rate cuts, a strong year end equity market rally developed. However, the “Magnificent Seven” (M7) contributed nearly half of the stock market’s overall gain.
As we started 2024, there was hope for a broadening force on the rally that ended 2023. Such an evolution has not taken place. As we near the end of the first full month of trading in the new year, growth is squarely beating value, the NASDAQ 100 has outperformed the S&P 500, and small and mid-cap market sectors are down while the S&P 500 makes new highs. The best performing sectors year-to-date are technology and communication services. These outcomes are not consistent with a broader rally, rather they are indicators of a return to the same playbook that drove the market in 2023. A concentration of market strength in a handful of names is mostly responsible for the S&P 500’s new highs. There is now growing concern the playbook is unsustainable.
If the market expects to realize a soft landing, it will have to shift away from an excessive focus on the Fed and the M7. Remember, it was the expectation of the Fed cutting rates that drove the year-end rally of 2023. Furthermore, investment capital was then and remains now too concentrated in mega-cap technology names. In order to make a transition back to normal market dynamics wherein macroeconomic growth leads to increasing earnings which leads to rising stock prices, the concentration of capital in Magnificent Seven (M7) names will have to disperse. Valuations in these few companies are already well above long-term averages. The idea M7 names can drive another year of growth is untrustworthy. On the contrary, a broadening of market participation based upon data rather than the Fed would likely be a strong signal that a soft landing will be realized.
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