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January 2024 Market Commentary: Federal Reserve Rate Cuts

December Recap and January Outlook

Market Commentary Highlights:

  • Federal Reserve may cut rates in 2024, with a projected decrease of 75 basis points.

  • December's labor market data showed a significant increase in non-farm payrolls and wages.

  • Retail sales growth moderated, and shelter inflation showed a downward trend.

  • Consumer expectations for inflation have declined, impacting policy decisions.

  • Equity and bond markets showed varied performance, with Information Technology leading gains.

At the end of last year and the start of this one, there was a lot of guessing about when the Federal Reserve (the Fed) would lower a key interest rate. This guesswork was based on recent signs that fewer jobs were being added and a hint from the Fed that they might not increase rates anymore. Most people were betting that the Fed would cut rates by March. But then, in December, more jobs were created than expected, and wages started growing faster than the cost of living, which made everyone rethink their predictions.

Looking into 2024, the Fed has a plan to slowly lower interest rates by a small amount each year until 2026. For 2024, they're thinking of a slight drop. This gradual lowering of rates is part of their strategy to cool down the economy just enough to keep prices from rising too fast (inflation) but without causing a big economic slowdown. The head of the Fed, Jerome Powell, says it's still a bit tricky to get inflation down to their ideal target of 2%, especially now that the economy needs to balance how much stuff is available and how much people want to buy.

What is the Data Saying?

  • Jobs in December: There was a surprise jump in new jobs – 216,000 were added, which is more than the 170,000 everyone expected. People also got bigger pay raises than predicted, with wages going up by 4.1% compared to last year.

  • Holiday Shopping: Even though people were earning more, they didn't spend as much over the holidays as they did the previous year.

  • Cost of Living in Houses: The cost of living in houses (renting or buying) has been really high since 2020, but lately, it's not increasing as quickly as before.

The Fed is trying to reach a point where they can lower interest rates without stopping the economy's growth. They've managed to bring down inflation a bit, but getting it back to their target of 2% is tricky. They need to balance how much stuff is available (supply) and how much people want to buy (demand).

The stock market, which had been on a rise for about nine weeks, faced a reality check at the start of the new year. This shift in mood was due to changing expectations about the Federal Reserve's (the Fed) interest rate plans. Initially, many thought the Fed would start lowering rates as early as March, but this optimism has been tempered. However, the possibility of rate cuts later in the year remains on the table.

The Fed's main goal is to reduce inflation to around 2%. Jerome Powell, the Fed's chairman, has been concerned about persistent inflation that resists policy efforts. Fortunately, signs of easing are emerging, particularly with housing costs not rising as sharply. This change is influencing public perception, with people now expecting slower inflation ahead. The Federal Reserve Bank of New York's survey revealed that people anticipate inflation to be around 3% next year, the lowest expectation since early 2021. This shift in mindset is crucial because if people believe prices will rise, they tend to spend more quickly, fueling further inflation.

The Fed predicts that by the end of 2024, inflation will be slightly above their target at 2.4%, and interest rates will be moderately higher. They also foresee a slight increase in unemployment. The economy is expected to grow, albeit at a slower pace, and any potential recession is likely to be mild. However, several unpredictable factors could impact this outlook, including the U.S. election year, fluctuating gas prices due to international tensions, and the broader impact of recent significant interest rate hikes, particularly evident in the slowing housing market.

Chart of the Month: Job Growth Surprises Everyone

After a couple of months where it seemed like not many new jobs were being added, December really surprised us with a lot more jobs than anyone expected. This big jump in jobs made investors think twice about whether the Federal Reserve would cut interest rates in March. It's important to note that the job numbers for the last two months were adjusted a bit lower. On average, about 225,000 jobs were added each month in 2023, which is less than the 399,000 jobs added monthly on average in 2022.

Source: U.S. Department of Labor data, unrevised. Chart: Axios Visuals

Equity Markets in December

The S&P 500 was up 4.42% for the month and ended the year up 24.32%

  • The Dow Jones Industrial Average rose 4.84% for a 2023 return of 13.70%

  • The S&P MidCap 400 increased 8.50% in December and 14.45% in 2023

  • The S&P SmallCap 600 was up 12.61% in December and ended the year up 13.89%

Source: S&P Global. All performance as of December 31, 2023

Equity markets closed out the year with enough positive performance to wipe the double-digit losses in 2022 off the slate. At the sector level, there were still winners and losers, with Information Technology out in front with a return over the two-year period (2022 and 2023) of 11.18%. Despite a loss of 4.80% in 2023, Energy has return to burn over the two-year period, up 51.41%. Utilities were the biggest loser, down 11.49% in the combined period.

Bond Markets

The 10-year U.S. Treasury ended the month at a yield of 3.88%, down from 4.34% the prior month. The 30-year U.S. Treasury ended December at 4.04%, down from 4.50%. The Bloomberg U.S. Aggregate Bond Index returned 3.83%, pushing the year-to-date return 5.15%.

Smart Money Moves

At the start of the year, we often think about getting things in order, like buying storage boxes for holiday decorations or a new planner. Just like organizing your home and schedule is a good idea, it's also smart to sort out your money matters. This can help you stay on track with all your plans for 2024.

Don't try to fix everything about your finances at once. Instead, think about what you want to achieve in life and how your money can help you get there.

  • Plan for Extra Money: If you're expecting a bonus, decide in advance how to use it. Consider saving, paying off debts, or investing in something important and avoid spontaneous spending to prevent wasting this extra money.

  • Handle Company Stocks Wisely: If you have stock options, think about whether this is the right year to sell them. Make a plan that aligns with your financial goals.

  • Tax Planning for 2023 and Beyond: Review your tax strategies from 2023 and look for ways to improve your tax planning in 2024.

  • Diversify Your Investments: Ensure you have a variety of investments, like stocks and bonds. Diversification helps protect your money from market fluctuations.

Starting early and planning ahead are proven ways to stay on course with your goals. As the year progresses, reaching your targets becomes simpler if you have a clear plan of what you aim to achieve, how you plan to do it, and if you set up automatic processes wherever possible.


About The Author

Alchemist Wealth is led by the expertise of Andrew J. Tudor, CFP®, RICP®, CAP® and Fred Tudor III, AFC®, MBA. Alchemist Wealth serves clients as a fiduciary specializing in providing fee-only financial planning, investment management, and retirement planning services. With over 2 decades of combined experience in financial services, Fred and Andrew bring a wealth of knowledge and personalized solutions to meet your financial goals.

The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.

This content not reviewed by FINRA

Alchemist Wealth, LLC is registered as an Investment Adviser with the State of Ohio and only provides advisory services in states where registered or otherwise exempt from registration. All information provided herein is for educational and informational purposes only and should not be viewed as investment advice. Any links to third party information or data are believed to contain accurate information at the time of publishing.

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