Economic Update 12-04-2023 

• Economic data for the week included Q3 GDP being revised slightly higher, while PCE inflation continued to decelerate. Manufacturing data remained contractionary on net, and new and pending home sales fell back. 
• Stocks gained globally as falling inflation and central banker comments led to hopes for lower interest rates next year. Bonds fared especially well, due to a drop in long-term rates leading to a strong duration effect. Commodities were mixed to down, with higher gold prices offset by weaker crude oil, despite OPEC+ production cuts. 

U.S. stocks fared positively to end November. In fact, the month’s S&P total return of 9.1% was the best single month in over a year. Positive sentiment was related to slower PCE inflation reading during the week, showing further deceleration in prices. More so, this was tied to some optimistic comments from Fed board member Waller, who has been seen as hawkish up until now, having updated his view of inflation ultimately getting back to 2% with current policy, and better chances of even ‘lowering the policy rate’ over the next 3-5 months. Markets jumped on the news, as this provided some hope for even more substantial rate cuts next year. However, before this exuberance got too out of hand, Chair Powell attempted to quash these dovish expectations, hinting at the still-possible chance of rate hikes ‘if’ data demands it. Seemingly now that probabilities are high that we’re at ‘peak’ Fed funds rate, the question of year-end has turned to rate cuts. 

By sector, only communications lost ground, while cyclical materials, industrials, and financials led by gaining several percent. Real estate also gained nearly 5% on the hopes for lower interest rates, as one of the most rate-sensitive groups. U.S. small cap stocks fared especially well, with the Russell 2000 up over 3% as easing rates are expected to help that segment to an even greater degree than large cap. 

Foreign stocks also fared positively with European consumer price inflation falling from 2.9% to 2.4%, a surprise on the downside, and core falling to 3.6%. Speaking of rate cuts, Europe has signaled that they’re further into the cycle than is the U.S., due to recessionary conditions. Expectations are for a faster timeline into easing—perhaps as early as Q1 or Q2 2024. Chinese stocks bucked the rest of the globe, by declining several percent as PMI data continued to contract; authorities also shared a 25-point plan to boost financial support in the private sector. 

Bonds fared quite positively, up several percent, as the 10-year Treasury declined by a quarter-percent, with fading inflation fears. Investment-grade corporates fared best, with additional help from the credit spread, while floating rate bank loans were flat on the week. Foreign developed market debt performed similarly, while emerging market USD bonds outpaced local. 

Commodities fell back generally, with declines in energy outweighing gains in precious metals, while industrial metals were little changed. Crude oil fell over a percent last week to $74/barrel, with price weakness over the past few months remaining focused on higher supplies running stronger than expected, as well as the removal of a geopolitical ‘risk premium’ in the Middle East. OPEC meetings last week (which had been postponed) were focused on two key issues: how they can share the burden of additional production cuts (by 2.2 mil. barrels/day early next year, albeit voluntary, leading to a muted price response) and a technical debate on 2024 output targets for West Africa. These appear to be niche issues, but all revolve around keeping supply manageable in order to sustain prices at a certain level with an uncertain global growth outlook. 

Period ending 12/1/2023	1 Week %	YTD %
DJIA	2.60	11.68
S&P 500	0.83	21.52
NASDAQ	0.41	37.76
Russell 2000	3.12	7.29
MSCI-EAFE	0.40	12.57
MSCI-EM	0.20	5.17
Bloomberg U.S. Aggregate	2.04	2.51

U.S. Treasury Yields	3 Mo.	2 Yr.	5 Yr.	10 Yr.	30 Yr.
12/31/2022	4.42	4.41	3.99	3.88	3.97
11/24/2023	5.54	4.92	4.49	4.47	4.60
12/1/2023	5.43	4.56	4.14	4.22	4.40

Sources:  LSA Portfolio Analytics, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger’s, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder’s, Standard & Poor’s, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research.  Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends.  Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.                                                                                    

The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness.  All information and opinions expressed are subject to change without notice.  Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product.