Traders are still clinging to their optimistic outlook of a soft-landing economy and a dovish Federal Reserve. However, despite briefly surpassing previous records, the S&P 500 fell short of reaching a new all-time high.
In the end, the S&P 500 closed the week with a 1.8% gain, coming just 0.3% shy of its record peak. Meanwhile, the Dow Jones Industrial Average experienced a modest increase of 0.3%. The Nasdaq Composite, buoyed by a 3% recovery in Apple stocks after a 6% decline in the first week of the year, saw a notable climb of 3.1%.
The market seemed resilient and unyielding. December’s consumer price index revealed a 0.3% monthly increase, slightly surpassing expectations. Year over year, prices rose by 3.4%, surpassing the 3.1% annual rate recorded in November.
At face value, these numbers weren’t particularly favorable for investors who desired a decline in inflation and a shift towards rate cuts by the Fed instead of hikes. However, the data presented enough complexity and uncertainty to maintain confidence in potential rate cuts. Traders currently perceive a 79% likelihood of a rate cut happening as early as March. In response to this sentiment, the 10-year Treasury yield dropped to 3.949%, down from the previous week’s level of 4.041%.
Inflation Outlook and Fed Rate Cuts
The recent data suggests a discrepancy with the prevailing notion. According to David Doyle, Macquarie’s head of economics, the decline in inflation will be a slow and gradual process filled with challenges. Progress towards the targeted 2% may be hindered. As a result, Doyle predicts that the Federal Reserve will only begin cutting interest rates in the second quarter.
Mixed Results for Banks in Fourth Quarter Earnings
The fourth-quarter earnings season has begun with a mix of positive news and lackluster results. On Friday, banks kicked off the season with most stocks experiencing a decline. JPMorgan Chase closed down by 0.7%, Bank of America saw a decline of 1%, and Wells Fargo dropped by 3.3%. However, Citigroup emerged as an outlier, experiencing a 1% rise in their stock value after announcing staff reductions of about 10%.
Reinforced Positive Narrative on Consumer Health
Despite the lackluster results, banking CEOs provided comments that reinforce a positive outlook on consumer health. During Bank of America’s earnings call, CEO Brian Moynihan expressed that consumers are still active participants in the economy. He noted that their spending patterns have shifted from retail goods to services such as dining out and experiential activities.
It’s worth noting that Moynihan had previously warned about a possible recession, but now he seems more convinced that the economy is heading towards a soft landing. This belief is supported by both the bank’s internal data and its research team.
Let’s hope that this positive outlook is not simply wishful thinking.
