Happy New Year! Below is an update with our latest thinking on the economy, markets, and portfolio considerations. Please feel free to share this with your clients as appropriate.
As we kick off 2024, we see a mixed outlook for the economy and financial markets. On the positive side, the outlook for the U.S. economy is modestly improving – we have lowered our probability of a mild recession in the first half of the year to 50%. On the negative side, however, uncertainty remains regarding Fed policy, corporate earnings, U.S. elections, and geopolitical factors.
After slowing down most of Q4 2023, the U.S. economy picked up activity at the end of the year. While job openings in the labor market continue to moderate, we continue to see strength in the form of average hourly earnings growth and lower than expected unemployment claims. The state of the labor market will be a key factor in determining how the U.S. economy performs throughout 2024.
U.S. financial markets ended the year exceptionally strong, rallying into year-end based in part on expectations for the Fed to aggressively cut interest rates in 2024. While market expectations are for six rate cuts with the first one happening in March, we expect the first move to happen later in the year with only 2-3 cuts total.
The U.S. Presidential primaries are heating up, and we expect this to capture headlines throughout the year. Congressional leaders reached an agreement for a $1.6T federal budget for 2024, but now the House and Senate have the challenging task of passing the underlying bills to fund the government for the year – the back and forth of these negotiations will continue to create uncertainty for investors.
The December Consumer Price Index (CPI) numbers came in slightly higher than expected, with inflation accelerating slightly from the prior month. Headline CPI stands at 3.4% year-over-year with Core CPI at 3.9%. While the downward trend in inflation seen throughout 2023 likely remains intact, further progress from here will likely be slow. Supply chain improvements have brought the yearly change in goods prices back near 0%, but services inflation remains elevated due to above average wage growth and shelter/housing costs.
After two months of strong gains and a year-end close to record highs, equity markets have seen renewed selling pressure and volatility to start the year. Caution about the timing of rate cuts, potentially overbought conditions, and geopolitical concerns have all weighed on sentiment.