2023 Year-End Review and 2024 Outlook

The headline on an article published recently online read “Consumers haven’t felt this good about the economy since 2021: December was no Fluke.”  This headline caught my attention, because we are being bombarded by news daily that the economy is terrible.  However, the article further reported that the latest University of Michigan consumer sentiment survey released Friday January 19 revealed that there was a 13% jump in positive sentiment through early January of 2024.  The reading came in at 78.8, the highest reading since July of 2021.  Additionally, the cumulative climb in sentiment of 29% over the last two months of 2023 is the largest two month increase since the U.S. economy recovered from the 1991 recession.

The consumer sentiment survey was dead on target. How can that be, when so much of what we hear on the news is that we are currently suffering with a poor economy? I find the negative news hard to believe when the current inflation rate stands at 3.35%, down from 6.45% last year and 9% in 2022.  In addition, the unemployment rate currently stands at 3.7%, which many economists suggest is close to full employment.  That is by far better than the 13% unemployment rate suffered during the Covid-19 Pandemic of 2020.  We have come a very long way over the past three years.

In this current era where news changes at the blink of an eye, we tend to forget what we have experienced over the past few years.  Let me offer a brief memory refresher.  In 2020 we were impacted by the worst global health issue since the global influenza pandemic of 1918, known as the Spanish Flu.  The Covid-19 pandemic killed over 1.1 million people in the United States alone.  Because of restrictions on travel and public access, this created a wholesale shutdown of many businesses with workers losing their jobs.  This limited the ability to get products on the shelf. I still remember seeing the pictures of the hundreds of ships at ports around the world with few workers to unload the ships and get products to their destinations.  To assist those affected, the government created a massive stimulus program, which put money in the hands of both individuals and corporations. As a biproduct of this massive distribution of cash, a scenario developed where too much money began chasing the too few products. This began the rise in prices and the start of an inflationary uptrend. When inflation peaked in 2022, the Federal Reserve Bank (The Fed) stepped in and began raising rates to curb the inflationary uptrend.

I am significantly encouraged by the current state of the economy. We have low unemployment with many millions of workers back on the job earning good wages and spending money which supports the economy.  Products are now more easily reaching the shelves and inflation is receding.

One obvious example of a healthy economy is the significant rebound seen in the stock market since October.  The markets are rising, and the economy is showing signs of recovery as evidenced by the strong employment growth and the dropping inflation numbers.  Just this morning, January 25, the GDP (Gross Domestic Product) showed that the economy grew at a 3.3% pace.  This was slightly higher than expected, but lower than the 4.9% exhibited in the third quarter of 2023.  This suggests that the economy is moving in a favorable direction.  That progress is reflected in the fourth quarter corporate earnings results, which began almost two weeks ago.  So far, over 70% of the corporations reporting have beaten analysts’ expectations.  This suggests strong overall profits for corporate America and a rise in the stock markets.

I can’t ignore the role that The Fed played over the past two years as it has focused attention on controlling inflation. The Fed’s action of raising rates has not been popular, but it certainly remains one of the few tools available to get the job done.  It is hard to ignore the progress that has occurred by simply looking at the precipitous drop in inflation.  However, one of the key tools used by The Fed to chart the progress is the Personal Consumption Expenditures or PCE. The PCE charts overall spending by consumers, excluding food and energy.  The PCE recorded a 2.9% increase in consumption spending.  This drop in the PCE is the first time the gauge has fallen below the 3% rise registered in March of 2021. This is upbeat news and has many asking, “when will The Fed begin to lower key interest rates?”  It is difficult to judge exactly when that may occur.  There are some very optimistic economists that believe the first rate-cut may come in March. Others that are taking a more conservative view say the first rate cut will likely come in June.  The Fed likes to see numbers that show what has already taken place rather than what will hopefully happen if things go as they should.  My sense is that we will probably see the first rate cut in June.

I have been closely monitoring The Fed’s actions.  I believe that the Fed governors are on the right track.  Overall U.S. inflation is easing and we are seeing progress globally as many of our trading partners have taken steps to control inflation.  This is positive news.  Lower inflation, lower consumption, strong employment and good earnings by corporate America are all leading toward an extended rise in the stock markets.

I have followed the markets for almost four decades.  The cycles, when experiencing and working through rough patches, all bear some similarities. Simply put, the markets witness excess, they get ahead of themselves, they hit hard times when the excess becomes a burden, action is taken to fix the problem and economic recovery follows.  This may sound simplistic, but I firmly sense that we are in the economic recovery phase and in the early stages of a new bull market.  It will become clearly apparent as the corporate earnings season progresses and when The Fed nods its head and begins the rate cutting process.  We are moving forward but let me emphasize that progress is not a straight line upward.  We make money by sticking with our plan and allowing cycles to work through the rough patches.  Markets do not move all at one time but move as earnings and good news present themselves.  I am encouraged by the direction that we are headed with our investment focus and the prospects of a prosperous 2024. I look forward to sharing the progress with you in future newsletters.

I wish you all a wonderful 2024.  Take time for yourselves and enjoy your families.  We all have so much to be thankful for. Please don’t hesitate to reach out to me with any questions that you may have.

 

Best regards,

Ruben E. Guerra

Guerra Investment Advisors

915-760-5551