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December 2023 | Equity Commentary

December 2023 | Equity Commentary

 

Published on January 12, 2023

Investors felt the holiday cheer in December, with the S&P 500 index rallying 4.5% for the month to finish 2023 with a total return of +26.3%.1 The rally lifted the Dow Jones Industrial Average to a new all-time high, and came within a percentage point of doing the same for the S&P 500.2 Risk assets seemed to benefit in December from the Federal Reserve effectively ending their monetary tightening campaign, with the benchmark fed funds rate held steady at the December FOMC meeting. The Federal Reserve also projected rates would end 2024 in a range of 4.5% to 4.75%, which is 0.75% lower than where the fed funds rate stands today.3 Put another way, the Fed telegraphed the potential for three rate cuts in the new year, a message that received a warm reception across the capital markets—especially considering the rising expectation for a ‘soft economic landing.’ In fixed income, 10-year U.S. Treasury bonds also rallied in December, with yields falling from 4.33% to 3.88% for the month.4 This completed a round trip for 10-year Treasury bond yields in 2023, which started the year at 3.88%, spiked up to 5% in October for the first time since 2007, then marched lower in Q4 to essentially finish the year flat.4

Relatively weak consumer spending data in October had many investors and economists worried the U.S. consumer would deliver an underwhelming holiday shopping season. Fortunately, those worries did not materialize. According to Mastercard SpendingPulse, shopping sales between the beginning of November and Christmas Eve climbed 3.1%, which was largely in-line with the National Retail Federation’s projections and not far from the 3.6% average shopping growth posted between 2010 and 2019.5 Zooming out to 2023 as a whole, one key area where spending rose was in auto sales. Easing supply chain pressures and ramped-up production led to rising inventories, easing prices, and more promotional deals. All told, 15.5 million vehicles were sold last year, a 12.4% jump from 2022, with many automakers reporting double-digit year-over-year sales gains.6

The relatively strong holiday shopping season coincided with rising U.S. consumer confidence. The Conference Board’s consumer confidence index rose from 101.0 in November to 110.7 in December, reaching a five-month high. According to the Conference Board, confidence rose across all age groups and household income levels, likely responding to a combination of rising wages, a strong labor market, rising stock prices, falling mortgage rates, and lower gasoline prices. Consumers indicated in the survey that they plan to buy more cars, major appliances, and houses in the next six months, a prospect likely bolstered by 30-year fixed mortgage rates falling for seven straight weeks.7 The U.S. housing market could use a boost following a weak 2023—though existing home sales in November were up 0.8% from October to a seasonally adjusted annual rate of 3.82 million, it was still the weakest year for sales in over a decade.7

The U.S. Bureau of Labor Statistics (BLS) reported that payrolls grew by 216,000 in December and the unemployment rate remained at 3.7%, both of which were better than consensus estimates. October and November payrolls were revised lower, which put the three-month average for job growth at 115,000 – not too hot, not too cold. In the job openings and labor turnover survey (JOLTS), it was reported that the U.S. economy had 8.8 million job openings, which signals to us that the labor market is rebalancing via fewer job openings and a lower quits rate, versus outright layoffs. Wage growth continues to run slightly hotter than the Fed likely wants to see, however, with average hourly earnings up 0.44% in November and at a 4.3% annual rate over the past three months. 3.5% annual wage growth would be more consistent with the Fed’s inflation target, in our view.8

Two key measures of inflation released in December, the CPI and the PCE price index, both signaled that prices continue to trend in the right direction. The consumer price index measure of inflation rose 3.1% in November from a year ago, an improvement from October’s year-over-year pace. Prices rose 0.1% month-over-month, which was higher than economists expected, but modest enough not to cause much concern. Falling gasoline and durable goods prices were offset by price increases for shelter (housing), auto insurance, and a few other services. Core prices, which exclude food and energy, were up 4% year-over-year. The Federal Reserve’s preferred inflation gauge, the PCE price index, decreased 0.1% in November and was up 2.6% year-over-year, all but confirming the Federal Reserve is indeed done raising interest rates in this cycle.9

One sustained pocket of weakness in the U.S. economy has been in manufacturing. December data from the Institute for Supply Management showed factory activity continues in a slow patch, with the manufacturing index coming in at 47.4. This reading was just a slight improvement from November’s 46.7 and marks the 14th consecutive month of contraction (readings below 50) in factory activity. The silver lining is that while factory activity may be somewhat weak, factory construction in the U.S. is experiencing a boom. Government subsidies tied to the Inflation Reduction Act and the Chips and Science Act, which included $39 billion in subsidies for semiconductor producers, contributed to a 40% increase in factory construction in 2022 followed by a 72% increase through the end of October 2023. December’s employment report adds a key data point, with U.S. nonresidential construction employment reaching an all-time high.10 Bringing these new factories online should serve as a tailwind to manufacturing activity in the medium term. 

 A risk that cropped up in December involves a key global shipping route through the Red Sea, where 12% of the world’s seaborne oil, 8% of its liquified natural gas, and 20% of all container trade pass through. In December, shipping companies increasingly rerouted vessels as attacks on merchant vessels by Houthi forces in Yemen have sparked fears that cargo and personnel could be in danger. Most notably, the shipping giant A.P. Moller-Maersk announced it would reroute vessels around the Cape of Good Hope in southern Africa, which adds time and cost to the movement of goods and energy.11 For now, the impact on global inflation seems contained, and the U.S. is working with allies to secure the route. But this will be an issue worth watching in the coming weeks.

Sources

1.Bloomberg: SPX Index TRA

2.The Dow Jones Just Hit an All-Time High. Here’s Why It Could Beat the Nasdaq in 2024. _ Nasdaq.pdf

3.With rate hikes likely done, Fed turns to timing of cuts _ Reuters.pdf

4.Bloomberg: USGG10YR Index

5.Mastercard SpendingPulse_ U.S. retail sales grew +3.1% this holiday season _ Mastercard Newsroom.pdf

6.U.S. Auto Sales Bounced Back in 2023 – WSJ.pdf

7.US consumer confidence jumps to five-month high; home sales eke out gains _ Reuters.pdf

8.Employment Situation Summary – 2023 M13 Results.pdf

9.Personal Income and Outlays, November 2023 _ U.S. Bureau of Economic Analysis (BEA).pdf

10.ISMworld.orgrob202312pmi.docx

11.U.S. Leads Bid to Secure Red Sea, but Shipping Firms Remain on Edge – WSJ.pdf

As of December 31, 2023

 

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