February 7, 2024
Economic Commentary
Last month, my colleague Chris Burns and I traveled around the state to deliver our 2023 Year-in-Review and 2024 Outlook seminar. We presented in six markets starting in Grand Rapids before heading to Bay Harbor, Traverse City, Midland, Birmingham, and finally, Kalamazoo. It was a pleasure to host and engage with nearly 400 of our clients and friends. If you were among those in attendance, thank you for joining us. If you weren’t able to be there, a video recording of our Kalamazoo presentation is accessible on our website.
We’re off to a decent start in 2024. If you believe the notion that “as goes January, so goes the year,” the so-called January Barometer suggests we may be in for a positive year for stocks. The S&P 500 returned nearly 2% for the month of January. Dating back to 1950, full year returns were positive 93% of the time when returns were positive in January with an average full year gain of almost 23%. Unfortunately, correlation and causation are two different things, but we’ll take what we can get.
Overall, in the first month of the year, global equities gained 0.6%. Domestic large caps added 1.7%, developed international stocks added 0.6% and emerging market stocks declined 4.6%. On the other hand, fixed income categories maintained a narrow range of -0.3% to +0.2% as yields edged higher.
As was the trend throughout 2023, the US economy again exceeded expectations in the fourth quarter with annualized real GDP growth of 3.3%, trouncing economists’ forecasts of 2.0%. At the beginning of 2023, the median forecast for full year GDP growth was +0.5% with economists predicting a 65% probability of a recession – one of the highest probabilities we’ve seen outside of an actual recessionary period. As it turns out, the US economy experienced full year growth of 3.1%, while anxiety about the prospect of a recession eased.
Any concerns over a cooling labor market were squashed with the January jobs report which showed a surge in payroll additions to 353K — the most in twelve months and widely exceeding expectations. In addition, December job gains were revised to 333K from 216K originally reported. The unemployment rate was unchanged at 3.7% marking 24 consecutive months below 4% and wage gains accelerated meaningfully month-over-month and year-over-year. Overall, the report highlighted a labor market that has been instrumental in powering consumer spending and economic growth, but continued above-trend hiring and wage growth could challenge Fed efforts to reduce inflation and might serve to extend the timing of future rate cuts.
Speaking of inflation, December data, reported in January, showed the Consumer Price Index (CPI) rose at 3.4% (year-over-year), accelerating from 3.1% in November and coming in above expectations of 3.3%. While this outcome remains higher than policymakers (and consumers) would like, it’s significantly improved from the June 2022 peak of 9.1% and the December 2022 level of 6.5%. At +6.2% year-over-year, shelter costs decelerated slightly from +6.5% in November and a peak of 8.2% in March. We continue to keep a close eye on shelter costs, which represent nearly one-third of the CPI basket and tend to impact the index with a lag.
Over the last year and a half, Fed officials have made significant forward progress in their efforts to reduce inflation and they have managed to do so without upending the labor market. While the monetary policymaking environment remains tenuous, the discussion for this cycle has turned from the prospect of additional rate hikes to the timing and extent of potential rate cuts. As expected, policymakers maintained the Federal Funds Rate target at 5.25%-5.50% following their January meeting. Investors are currently pricing in five rate cuts in 2024 (down from six at the beginning of the year). However, Fed projections, provided in December, call for three cuts this year and January commentary seemed to suggest Fed officials are in no rush to loosen policy.
As always, we look forward to sharing our views as we navigate the first quarter and the balance of 2024 and we encourage investors to lean on discipline and the benefit of a long time horizon during periods of uncertainty. On behalf of the entire team, thank you for allowing us to serve on your behalf.