Growth
The U.S. economy expanded at an impressive 3.3% annualized rate in 4Q23, a deceleration from a very strong third quarter but well above consensus expectations for 2.0% growth. Many of the underlying details looked strong but consumption, again, powered the economy in both goods and services. The biggest upside surprise was trade, which rose at a 6.3% ann. pace while inventories grew at an unsustainable pace. Growth will likely be slower in 2024, but continued resiliency in the consumer, disinflation progress and a modest rebound in housing should help the economy grow at a decently positive rate.
Jobs
The January Jobs report showed a labor market with plenty of momentum to start the new year. Nonfarm payrolls rose by an impressive 353K, almost double consensus expectations, with gains widespread across the economy. The unemployment rate held steady at 3.7% for a third straight month, while wage growth accelerated to 0.6% m/m and 4.5% y/y. That said, bad weather keeping lower earnings workers at home may have played a role in the hot wage print. Overall, while annual revisions and statistical adjustments caused some noise in the data, this report highlighted a very strong labor market and reduced the likelihood of rate cuts from the Fed before the summer.
Profits
The 4Q23 earnings season is winding down. With 92.9% of market cap having reported, our current estimate for operating earnings per share (EPS) is $51.55. If realized, this would represent y/y earnings growth of 2.3% and a q/q decline of 1.3%. Corporate profits look set to end 2023 on a high note, as economic activity remains resilient. Across sectors, information technology and communication services are both on pace for a strong quarter, while lower oil and natural gas prices have weighed on the energy sector. Looking forward, downbeat forward guidance from management teams could weigh on consensus estimates for earnings growth in 2024.
Inflation
The January CPI report came in hotter than expected, with headline CPI rising 0.3% m/m and 3.1% y/y while core inflation gained 0.4% m/m and 3.9% y/y. Across core services, shelter inflation accelerated to 0.6% m/m, supported by the fastest monthly increase for owners’ equivalent rent in 9 months. Auto insurance and airline fares both rose 1.4% m/m, while medical care services also remained elevated. Elsewhere, core goods prices eased despite shipping disruptions, falling 0.3% m/m. While strong, this report does not challenge the broader progress made on disinflation. Importantly, this print does dash hopes for any rate cuts in the spring, although favorable economic data in the coming months would allow the Fed to kick off policy easing in June.
Rates
At its January meeting, the FOMC voted to hold rates steady at 5.25%-5.50% for a fourth consecutive meeting. Revisions to the statement language suggest that the committee is now biased toward interest rate cuts, although it may not begin cutting as soon as markets anticipate. In fact, during the press conference, Powell stated that recent data leads him to believe that a March cut is unlikely. Importantly, Powell’s comments indicated that while the Fed is not ready to scale back quantitative tightening yet, it would talk about that process more at its March meeting. Moving forward, the Fed will be on the lookout for more “good” data to gain confidence that inflation is steadily moving back to 2% before delivering rate cuts.
Risks
- Rate cuts may not occur as quickly as expected, presenting challenges to both stocks and bonds.
- A slow-moving economy is highly vulnerable to any kind of shock.
- Elevated valuations in some parts of the market may lead to volatility and market corrections.
Investment Themes
- Despite the recent bond market rally, fixed income still offers attractive yields and protection against an economic downturn.
- Solid profit growth and reasonable valuations will be crucial in determining equity winners in a higher rate environment.
- Long-term growth prospects, a falling dollar and wide valuation discounts support international equities.
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Originally Posted February 26, 2024 – Economic Update
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