The new year has started off with a return to the patterns of 2023. Interest rates have jumped, on concerns that the Federal Reserve (the “Fed”) will not cut interest rates as quickly as hoped. During the fourth quarter of last year, the bond market priced in a nearly 70% chance of a March rate cut. That has now dropped to less than a 50% chance. This has put pressure on almost all assets, most notably bonds and other interest rate-sensitive sectors. There has been quite a bit of cheering over the market-cap weighted S&P 500 touching a new high (SPY), but the reality is that the gains in that index this month do not reflect the broader market. It does reflect the continued outperformance of technology, particularly the “Magnificent Seven” that carried the market-cap weighted indices (QQQ, SPY, and DIA) most of last year. I have included a chart below, which evidences what I am talking about.
Source: Stockcharts.com as of 1/25/2024
To me, this indicates we are still in a holding pattern, while waiting for further hints from the Fed. Incoming data continues to evidence strength in the labor market and in the consumer. Fourth quarter GDP came in way above forecast and suggests a “soft landing” as growth ultimately slows due to restrictive interest rates. What that good news does not provide is much impetus to cut rates. The Fed cuts rates to stimulate the economy when it needs help. Right now, it does not seem it needs much help. This analysis is resulting in a moderate digestion of the big gains we saw across the board in November and December. I believe this is all to be expected and not a bad thing. I am happy to have the prospect of rate hikes off the table knowing the next move will be to cut. I also like the fact that we seem to be able to do business and grow earnings at the current interest rate levels. The 10-year Treasury Note is just north of 4% and consistent with historical averages. After the past two decades of printing money and driving rates down, we are seeing some return to normalcy. There is still a record national debt to deal with, as well as consumers spending money they don’t have, but at least retirees and others can get a fair return on their safe money.
On Friday morning, we got the all-import PCE inflation number (which came in slightly below expectations) and this Wednesday we will get the conclusion of the January Fed meeting. I suspect the next week will determine the glide path forward for interest rates, as well as most asset classes, for the first half of the year.
At Cabana, we remain in our Transitional Bullish Scene within CARA and are invested across all portfolios accordingly.
- Magnificent Seven is a nickname for seven mega-cap tech companies whose stocks routinely do well.
- CARA is Cabana’s Cyclical Asset Reallocation Algorithm.
- QQQ is an exchange – traded fund (ETF) that tracks the Nasdaq 100 Index.
- SPY is an exchange-traded fund (ETF) that tracks the S&P 500 Index.
- DIA is an exchange-traded fund (ETF) that seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the Dow Jones Industrial Average (the “DJIA”). It tracks the performance of the 30 largest U.S. companies by market cap.
- Soft landing refers to a moderate economic slowdown following a period of growth.
- Bullish (or a recognized bull market) is a period of time in financial markets when the price of an asset or security rises continuously.