In this week’s Steady Investor, we explore current market news that we believe investors should keep on their radar, such as:
• Update on the Fed and rate cuts
• Takeaways from the Q4 2023 earnings season
• Congress passes bill to avert government shutdown
Fed Chairman Jerome Powell Testifies on Inflation and Policy – On Wednesday, Federal Reserve Chairman Jerome Powell appeared before the House Financial Services Committee to give testimony on inflation and monetary policy. Powell mostly stuck to the script, highlighting progress made on inflation thus far, but also striking a cautious tone about moving too quickly on rate cuts. In short, no surprises. Market expectations for rate cuts commencing in June did not change, and neither did Fed projections for three rate cuts in 2024. One positive takeaway was a reminder that the Fed is not necessarily waiting for inflation to fall back down to 2% exactly. In Powell’s words: “We’re not looking for better inflation readings than we’ve had. We’re just looking for more of them.” Statements like this one make the next few months of inflation data critical, and we will want to see a sustained improvement trend – even if just slightly. We know that shelter costs are likely to improve as the year goes on, which “bakes in” improvement in the data in a meaningful way. The central bank has been taking comfort in the strong economy, which has given them a bit of runway in deciding when to make cuts. But they are also cognizant of the risks, as evidenced by this comment made by Chairman Powell: “Reducing policy restraint too late or too little could unduly weaken economic activity and employment.”1
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Q4 2023 Earnings Season is Over. Here Are Some Key Takeaways – For the second consecutive quarter, S&P 500 earnings were positive. This showing from U.S. corporations aligned with our expectation that the earnings recession would end in Q3 2023, even as Energy and Materials somewhat obfuscated the data by anchoring overall earnings lower. On the flip side, many would argue that technology and internet stocks disproportionately pulled the overall earnings figures higher. In a sense, both arguments are right. On a sector level, Consumer Discretionary (+52% earnings growth) and Communication Services (+43%) pulled the overall earnings numbers higher, and they also happen to be sectors that hold four of the “Magnificent Seven” stocks. On the other hand, Energy (-25%) and Materials (-20%) pulled overall data lower, as commodity prices weakened. In aggregate, Q4 earnings growth came in at 4.4% year-over-year, and moving ahead we expect better performance from the non-tech sectors in the economy while the AI-driven earnings bump likely ease due to higher comps. Anecdotally, Q4 results for hotels, restaurants, and leisure posted 88% year-over-year earnings growth, underscoring the ongoing strength of the consumer and the possibility of more upside surprises in 2024.3
Looks Like a U.S. Government Shutdown Will Be Averted, Again – At this stage, many investors may see budget wrangling and looming government shutdowns as ‘non-stories,’ and that would be ok. It seems that this story reappears every few months in the form of possible debt defaults or a shutdown, only to have a deal ultimately worked out, and the crisis subsequently fades. That looks to be the outcome this time around, too. The U.S. House of Representatives passed legislation on Wednesday, with a bipartisan vote of 339-85, to fund several key agencies in the government with a few more to go. At this stage, Congress is already more than five months behind in accomplishing the very basic task of funding the government, and there are still more agencies to be funded by the March 22 deadline. Those include the Defense Department, Homeland Security, the State Department, and Health and Human Services. All told, the budget for fiscal year 2024 looks to be about $1.66 trillion, which is lower than the $1.7 trillion spent in 2023.4
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Disclosure