This week provided more proof that the US economy is steaming ahead. Economic growth in the fourth quarter trounced forecasts and gross domestic product increased 2.5% for the year. On Friday, there was even more good news for the US on the inflation front. The Federal Reserve’s preferred gauge of underlying price pressures – the core personal consumption expenditures price index (PCI), cooled to an almost three-year low in December, even with robust holiday spending. That report capped a year in which inflation retreated at a much faster rate than the Fed anticipated, all while a sturdy job market kept powering consumer spending. For the week, the S&P 500 finished 1.1% higher, the Nasdaq Composite gained 0.9% and the Dow Jones Industrials added 0.7%.
Treasury Secretary Janet Yellen echoed the optimism at the Economic Club of Chicago this week saying “Instead of contracting, the economy has continued to grow. Consumers are seeing their fortunes improve, and I believe that if inflation stays low, they’ll begin to regain their confidence in the economy. It’s a good thing, reflective of strong, healthy spending and productivity improvements, and most likely not creating an inflationary challenge.”
What can go wrong?
Future Wealth’s View
Earnings thus far have been a mixed bag – Intel and Tesla disappointed, Netflix soared, TSMC and Applied Materials raised guidance and we still have a slew of big earnings next week. It appears that if corporate earnings keep up with expectations in 2024, the market could continue to rally. But, investors would be wise to pay attention to the numbers – just 27 days into 2024, and the S&P 500 has already blown past the consensus over where the index would finish the year. Helped by advances in Nvidia and Microsoft, the equity benchmark has been heading in the direction of 4,900 over the past week. This run up in the stock market reminds us of the words from Alan Greenspan in the 1990s of “irrational exuberance” that ultimately ended with the bursting of a speculative bubble. Even more worrisome is the wild ride in the 1920s that put the country into a decade-long depression.
With ~$6 trillion sitting on the sidelines in money market funds, the FOMO (Fear of MIssing Out) effect is sure to take hold, driving the markets even higher. But, the astute investor would be wise to look at fundamentals – valuation, cash flow, profitability, margins, debt etc. of each of their holdings as the stock market inches higher. Taking profits never hurt anyone.