The Market’s All Right
Economic data is beginning to build a trend of not only a recovering but a growing and expanding economy. The PMI index came in above 50 for the first time in 9 months (what the PMI? scroll to the bottom for a summary ), 4th QTR GDP came in at 3.3% annualized (vs. expectations of 2% growth), and inflation continues to show signals of moderation. We’re not getting any ducks in a row, counting chickens, or organizing any other farm animals for the time being but it’s quite possible we may have a soft landing without a recession just yet. If one is to come, it may be more cyclical and industry specific.
Investors will be tuning into the Federal Reserve meeting this Wednesday. The Fed is expected to keep interests rates at 5.25-5.5% and will likely use this meeting to comment on the progress of the economy. Our ears will mostly hear “blah blah blah” until the Fed comments on whether there are rate cuts coming this year which investors are anticipating in the back half of the year.
Let’s see the numbers
PMI
PMI above 50 for the first time in 9 months at 50.3
Services PMI came in at 52.9 for January vs 51.4 in December (above expectations of 51.5).
GDP
Second, U.S. economic growth continues to surprise to the upside. Fourth-quarter GDP growth in the U.S. came in at 3.3% annualized, well above expectations of 2.0% growth. This strength was driven by ongoing resilience in consumption, which grew at 2.8%. This is now the sixth quarter of U.S. economic growth coming in over 2.0% -- above potential growth of 1.5% - 2.0% -- despite facing higher interest rates. Remarkably, over the last two quarters we have seen 4.9% and 3.3% growth rates, well above trend. Source - Edward Jones
Inflation
In addition to strong economic growth, the data over the past week also supported an ongoing moderation in inflation. In the PMI report, the prices-charged index, a measure of inflationary pressures, eased to its lowest since May 2020, coming in at 51.7 in January.1 This is also down sharply from its recent peak of 74.6 in April 2022. Perhaps even more notable was that, last week, core PCE (personal consumption expenditures) inflation data, often considered one of the Fed's preferred inflation measures, came in below expectations for the month of December. In fact, core PCE inflation is now 2.9% year-over-year, below last month's 3.2%, and below 3.0% for the first time since 2021. The ongoing moderation in inflation, despite above-trend economic growth, has led to optimism that the Federal Reserve may be able to start cutting policy rates rapidly this year to return to more neutral rates. Source - Edward Jones
Implications
The economy is strengthening and beginning to build a positive trend. A growing economy and moderating inflation coupled with the possibility of a less restrictive Fed and monetary policy in the back half of the year provides an optimistic backdrop for the year. With much of the economic reset expectations baked into valuations, the current economic backdrop presents a picture of moderate and stable growth heading into 2024. Of course, unknown externalities can always cause a significant change in this picture (e.g., World War 3) but let’s just keep hoping that doesn’t happen.
Investment moves
Specific Companies: It’s not a bad time to get back into the market, look for strong and stable companies who’s values were cut in 2023 and have made adjustments to improve their margins (e.g., layoffs). Large caps are poised to benefit from the stabilizing and potentially less restrictive environment this year
Broad Based Investments: ETFs are not a bad way to go this year as the market looks to recover and get back on a track of reasonable and moderate growth. Consider investing in the S&P 500, Nasdaq, VTI, or into semiconductors (SOXX, SOXL) where there are seemingly never enough chips to go around.
What Is the Purchasing Managers' Index (PMI)?
The Purchasing Managers' Index (PMI) is an index of the prevailing direction of economic trends in the manufacturing and service sectors.
The PMI is a key economic tool and is among the most reliable leading indicators of the U.S. economy. The index is reported by manufacturing and services. There is also a hospital PMI that is released on a monthly basis. The index sheds insight into the business environment and also helps companies get a grasp on where the economy is headed.
It is a survey-based indicator that is compiled and released each month by the Institute for Supply Management (ISM). The survey is sent to senior executives at more than 400 companies in 19 primary industries, which are weighted by their contribution to U.S. gross domestic product (GDP).
The surveys include questions about business conditions and any changes, whether they are improving or deteriorating, or have no changes. The PMI is based on five major survey areas—each of which is weighted equally:
New orders
Inventory levels
Production
Supplier deliveries
Employment
The headline PMI is a number from 0 to 100. A PMI above 50 represents an expansion when compared with the previous month. A PMI reading under 50 represents a contraction while a reading at 50 indicates no change. The further away from 50, the greater the level of change.
The Purchasing Managers' Index results are released on the first Monday of every month.
Source: [Purchasing Managers' Index (PMI) Definition and How It Works]
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