Issue 2 / January 9th
By Noah Bohman | The Risk Report
View the Full Report at TheRiskReport.org
Happy New Year Readers!
It is a new year! A new you! And a new stock market with momentum like a roller coaster coming out of 2023. From the lows in October to the highs in December lets take a look at 2023 and see what risk and positive notes will carry over into the start of 2024:
The Federal Reserve took interest rate to new highs in September.
Bonds prices stabilized, while retreating yields helped give the market room for a rally.
Cash became very expensive to borrow, it left corporation borrowing less and slowing production.
Inflation dropped to 3% which is great for the U.S. economy and the consumer.
Signs of a soft landing are growing which is a better outlook for the medium term.
The government is passing the spending bill with no hold ups (technically a 2024 issue).
The Fed paused rate hike which started the November and December rally that pushed the stock market to fresh new highs.
Looking at the risk that remains from 2023 and moving into 2024 lets take a look at how it will effect markets moving forward. The overall outlook of the market relies heavily on economic policy and the quantitative tightening that has been takin place since the end of the pandemic. We know why the Fed is tightening policy (to help ease inflation), but this is a critical stage where the Federal Reserve needs to not keep the pressure to tight on interest rates, but lower them at the appropriate time so the economy does not stall. If the Fed tightens policy we risk having a short monetary supply and they risk stalling the economy. If the Fed loosens policy to early they risk inflation retreating back up. Maybe, they choose to hold rates and see how the economy reacts since the interest rate hikes have a delayed monetary effect. It will be a wait and see game, the Fed has lots of data to take into accounting and they will do what they believe is right. The question is, just how will the market and the economy react to those moves.
Going into 2024 quarterly earning will be coming from companies starting the week of January 15th with banks and some big names in tech following the week after. You should note that major tech companies gave a softer outlook when they reported earning in October and that Brough stocks down with it. Although momentum has soften at the beginning of the year, that resistance could be met with further disappointment if the outlook for more companies comes in softer than expected.
View the economies Hard Risk Points on the risk report website
Looking at the momentum carried into 2024 we see that the Federal Reserves move to hold rates steady was welcomed news for traders as it help boost stocks higher towards the end of 2023. The first true test will be the December inflation report and the Fed meeting at the end of January to see if the economy stayed cool or is cooling more, this should help deduct the Fed’s motive for there next interest rate move. If rates have cooled we should expect excitement in sediment, but if inflation stayed the same or rose we could see a scenario where markets stay there current course or if rates are set to raise a scenario where markets start to post negative results. The momentum from 2023 was strong but the market will need a catalyst to keep the forward momentum.
With a strong jobs report stating that initial new jobless claims have fallen to 202,000 dropping 18,000 from November to December we can see that the American work force is staying strong. The Fed is looking for the economy to cool, but these numbers might show that the economy is staying a bit hotter then the Fed would like. The U.S. has also added 2.7 million jobs for the entire 2023 year and added 216,000 jobs in December. In the release of the Fed’s meeting notes from December the Fed mentioned that they have not created a concrete path for interest rates. You have to assume that this information only strengthens the Fed’s call to hold rates or raise rates at there next meeting at the end of the month. A strong jobs market is what helped the economy stay hot through 2023 with consumer spending at elevated rates. Those data point were consistently tied to the Fed’s reports and are top of mind when looking at strength factors of the economy. We will have to wait and see how the Fed interprets strong economic data at this point in their tightening cycle.
As long as bond yields do not rise over the next couple of weeks the momentum for the S&P 500 should stay relatively positive. We did see a pull back at the beginning of the month which is natural for rallies but we will have to wait and see if the momentum can continue. This moves The Risk Report indicator to a 4 out of 10 until companies start report later this month. The good news is the Fed does not have a meeting until January 30th-31st, which means potential pressure from rising rates will not impact equity markets until February if any pressure is felt at all. It will be curious if the stock markets sees a call to keep rates the same as a positive or if that move was fully priced in from the call to hold rates in November. If yields possibly lower During the month of January that could spur positive news in the stock market and push prices higher.
View the economies Soft Risk Points on the risk report website
Looking at 2023 momentum, the December jobs report, yields and earnings we see a decent amount of risk to equity markets through the month of January. We can see that the stock market snapped its nine week winning streak during the first week of trading in Jnuary. The question is are we looking at a natural correction for the rally or if investors are starting to roll into defensive safer stocks or cash (still has a good enough return rate) seeing a weaker outlook for the economy. Bonds need consistent monitoring, the slightest fluctuation in price has caused the stock market as a whole to move in either direction depending on the move on a daily or two day basis. Earnings hold a lot of weight towards risk in Q1 this could be the factor that sheds off recent gains in the S&P 550 and the NASDAQ. Strong corporate earnings and positive outlooks have helped the stock market stay strong since the end of the pandemic but with tighter money policies from the Fed, companies have been moving out of a growth model and cutting back on spending since September. With a pull back in spending across organizations that effect will be felt in the economy and should give companies softer outlook guidance through 2024. If consumers stops spending with them it could bring more negative sediment. At the end of the day the Fed still needs the economy to cool so inflation can come down and with less money being spent it might help the rest of supply meet back up with demand.
View the Outlook at TheRiskReport.org