Confidence Rising

In the run-up to this issue, we have seen confidence increase across several different economic areas.  For example, recently we saw a move higher in small business optimism, homebuilders’ confidence, and consumer confidence.  One needs to look no further than the Conference Board’s consumer Confidence Index, which hit its highest level since December 2021.  Sentiment is extremely positive, also buoyed by a blowout labor report last Friday.

The trend for US stocks continues to be higher.  Our review of various contributing conditions showed more checkmarks supporting stock than detracting.   But beware of complacency.  When it looks like smooth sailing that is usually when the markets deliver a gut punch.

Let’s take a close look at some of the factors contributing to the favorable trend in the equity markets. 

1.  We’re near the end of higher interest rates.  We may only get three Fed cuts in 2024 instead of the six that the markets have been pricing in (and the markets will react with volatility until expectations meet reality).  However, the Fed pivot is the key.  There are no more hikes on the horizon, and it appears we will get our first cut sometime in late Spring.  Historical data shows significant gains in the S&P in the year following the first Fed cut. 

2. Chances of an economic soft landing continue to be good.  How do we know?  There is plenty of evidence that the consumer is strong and resilient.  The jobs report for January and the recent job openings report confirms a tight labor market and plenty of jobs to fill.  Inflation is receding.  This data indicates it will be very hard for the economy to fall into recession taking one of the fundamental risks to stock practically off the table.  Interestingly, we have heard some talk of a “no landing “scenario, whereby the economy and inflation both remain elevated.  If this were to happen it could require the Fed to reverse course and implement additional hikes to push inflation toward the 2% goal.  We see this scenario as unlikely.

3. Geopolitics have not had a major effect on global inflation so far.  We consider this to be the biggest near-term risk for stocks as we sit today.  With the US retaliating against Iranian proxies and the ongoing war between Israel and Hamas, the risk of widespread hostilities in the Middle East is not insignificant.  Rumors of a Russian offensive in Ukraine add to the uncertainty. 

4. Corporate earnings are expected to grow 8-10% in 2024.  Although there has been a slight deterioration in the earnings picture, there is no negative shock within view. 

5. Yields for money market funds and safe bank products will dwindle as the Fed cuts rates, shifting money out of these instruments and toward risk assets.