THE WEEK IN REVIEW: December 10-16, 2023

Markets hit new highs as we accelerate into year-end

Markets had a great week as they awaited inflation numbers and the decision from the final Federal Reserve meeting of the year. Let’s just say the data and the meeting did not disappoint.

We started the week working off a slowing jobs growth number from the Bureau of Labor Statistics (BLS) report the prior week, indicating the job market was cooling in the wake of the Fed’s rate hikes. Then Consumer Price Index (CPI) and Producer Price Index (PPI) readings showed inflation didn’t increase and is trending back down, although it is still above the Fed’s preferred 2% level.

With the tailwind of data starting to pick up and the Fed pausing rate hikes once again, markets were in a good mood — and the positivity continued following Fed Chair Jerome Powell’s post-meeting comments. He hinted at rate cuts next year, which signaled to markets that the rate increases are done. That was all it took to rocket the Dow above 37,000 (a new all-time record) and send the S&P 500 above 4,700 (a new high for the year and less than 100 points away from a new all-time high).

After the last rate increase in July and a long, tedious game of “wait-and-see” over the summer and fall, last week the Fed was done — and the markets took it and ran with it. The “Santa Claus” rally, which began early at the end of October when the fever on the U.S. 10-year Treasury finally broke at near 5%, has continued to pick up steam. The benchmark 10-year was below 4% last week, a stunning drop in a little over a month.

After a sad 2022, markets bounced back phenomenally this year. Was it easy? No. Were there moments of doubt and angst? Sure. But if you stuck it out, you are being rewarded. Doesn’t it feel good to be roaring into a new year instead of limping in like we did at the start of 2023?

Inflation is still here — but does it matter?

We have all heard the phrase “higher for longer,” a euphemism the Fed uses to indicate they will keep rates elevated until inflation drops to or below their target 2% level. But maybe there’s a different definition of “higher for longer” we should use: that inflation will remain at a higher level for a longer period than the Fed would like.

The Fed doesn’t seem to have the will to continue raising rates until we see 2% because that would most likely plunge us into a deep recession, which nobody wants. Instead, the Fed will probably do what the Fed has done for the past 15+ years, engaging in words and experimentation such as quantitative easing and other central banking shenanigans. They will also parse definitions like “transitory” and tell us that 3% inflation is really 2%, and that’s close enough because it’s within a range of +/- 1%. And voilà! We could have 3% inflation going forward and the Fed won’t have to do any more lifting.

Will 3% inflation matter in the end? With a $30+ trillion national debt, elections, wars and all the rest, will 1% one way or the other matter? The Fed doesn’t seem to think so — and doesn’t think we will, either. It seems they’ve accomplished their mission, and the markets are moving on.

Coming this week

After a couple of big weeks for data, this week should be a quiet one as we move toward the holiday.
We’ll see MBA mortgage applications on Wednesday.
Third-quarter gross domestic product (GDP) will be revised for the third and final time on Thursday. The latest Philly Fed manufacturing and U.S. leading economic indicators will also be released that day.
Friday will feature core Personal Consumption Expenditures (PCE), which is a key measure for the Fed and should continue to show a slowing economy and consumer spending. Inflation should also be muted, which will likely continue to fuel the market.