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Quiet end to 2023 as markets look forward to 2024………

  • After drifting up the last few days of 2023, Wall Street starts the New Year a bit nervous with broad declines in many securities, especially in those sectors which have recently outperformed. One Schwab analyst suggested that the recent declines broadly reflected a combination of profit-taking and investor rotation into last year’s underperforming sectors, specifically energy, health care, and utilities. Adding to recent downward pressure, concerns about increased tensions in the Middle East have caused global oil prices to rise. Also of continued worry is the ongoing U.S. standoff with China over semiconductors as the Netherland government ordered a major chipmaker equipment supplier to suspend some exports to China.
  • As the week progresses, investors will be focused on new economic readings as they should give additional color to the Fed’s next move. Nonfarm payrolls, unemployment, and job openings data are all coming out over the next several days with expectations remaining generally positive. Counterbalancing some of the recent optimism was today’s job openings data which hit two-year lows – thereby fueling concerns that the labor market may be softening faster than the Fed originally predicted.
  • Currently, five or six quarter-point Fed interest rate cuts are projected for 2024. By contrast, a December forecast by the Fed suggested that the central bank would only make three cuts. As of this morning, the CME Fedwatch Tool was predicting only a modest likelihood of a rate change at the FOMC’s January end meeting but a nearly 72% likelihood of a rate cut at the Fed’s March meeting.
  • The challenge for investors currently is that stocks appear to be priced for perfection while there is still much that could go wrong. There is a reasonable likelihood that inflation is more sticky and that the Fed does not cut as much as the market expects. If the Fed does loosen policy as much as anticipated, it may be because the economy has sharply slowed with production plunging as it runs into the wall of past rate hikes.