As we approach the end of 2023, we thought it was a good time for an overview of the economy through the eyes of the stock market.  If you look at the S&P 500 Index, it’s up 13.23% through November 9th.  The NASDQ is up an even better 29.19%, and the Dow Jones is up 2.25%. However, if you dig a little deeper, you will see a different story.  Most of the gains of the S&P 500 can be attributed to what market watchers began to call the Magnificent 7. These are seven technology stocks that are closely tied to Artificial Intelligence. After having miserable performance in 2022, they have been up significantly this year.

So, the question becomes why has the market been so muted and frustrating? The answer can be summed up in 2 words, interest rates.  Ever since the Federal Reserve started to raise interest rates last year and took the benchmark rate from basically zero to 5.25% – 5.5%, fed watchers and Investors have been focused on when the Federal Reserve will stop raising interest rates.  The Federal Reserve’s target for the Consumer Price Index (CPI) is 2%. The Current CPI is 3.7%.  Still a good distance from their target but way down from the high of over 9% in June of 2022.

The anomaly in all these numbers is, while there is proof throughout the Economy that certain sectors are feeling the weight of higher Interest Rates and have slowed down (Real Estate and Bank Lending for example) the overall economy has bent but not broken.

Reasons to be Optimistic:

  • Solid earnings reports
  • A significant drop in the CPI
  • The Unemployment Numbers remain very strong.
  • Consumer Spending remains relatively stable.
  • In the third quarter, the Gross Domestic Product rose by 4.9% which is a very strong number for an Economy the Feds are trying to slow down.

When the GDP number was released on October 26th the stock market proceeded to sell off on fears the Federal Reserve is not finished raising interest rates and has more ammunition to continue rate hikes to slow down the economy. This is a great example of the stock market going down on good news. You would think people would be happy if the economy grew by almost 5% under any circumstance, but not this time. Before the data was released, the hope was that the Federal Reserve would be finished raising Interest rates for the rest of this year, and maybe raise rates only one more time in 2024 and then stop.  Now there is renewed concern that a hike is back on the table one more time before the year is over.

Fast forward to November 1st when we received good news. The Federal Reserve met but did not raise rates and hinted they are probably finished raising rates for the year, and perhaps all together. Whether this is true remains to be seen.  Fed Chief Jerome Powell is very measured in his comments. Any hint they might be taking their foot off the pedal was received as Good news. This time, the Good news was simply that— Good news.

Shout out to Michael Hartzman from Lebenthal Financial Services for this excellent article!

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