The first month of 2024 echoed the prevailing narrative of late 2023, characterized by moderating inflation, a resilient economy, and the anticipation of imminent interest rate cuts, driving U.S. stock indices to new record highs. Despite suffering its worst single-day loss since September on the final day of the month, triggered by Big Tech earnings and disappointing guidance from the Federal Reserve regarding the timing of interest rate cuts, the S&P 500 concluded January with a +1.6% gain. The U.S. economy continued to grow above longer-term trends, with GDP growing at a rate of 3.3% in the fourth quarter of 2023. The chart below highlights the long-term divergence between U.S. and European Union economic growth. In 2007, EU GDP per capita was over 70% of the U.S. In 2023, according to the IMF, EU GDP per capita is now only half that of the U.S. GDP.
The upcoming months will be a critical period for the Federal Reserve as it deliberates on the timing and magnitude of interest rate cuts. The Fed held its first policy meeting of the year on January 31st, keeping rates steady. Chairman Powell indicated an interest rate cut was unlikely in March but would likely materialize later in the year. The market now projects a 95% likelihood of a minimum 25-basis points rate cut at the May meeting. In addition to a high degree of confidence that interest rate cuts are coming in May, the market is increasingly optimistic the economy will sidestep a recession and achieve a soft landing. It’s important to recognize that unwavering certainty can introduce vulnerabilities.
Looking forward, we have a labor market that remains robust, a consumer who remains confident and continues to spend, and inflation that continues to ease. We recognize the need to be nimble in a market that has high hopes for a monetary policy-driven rally, which may or may not come when expected.
-Laura G. Andersen, CFA