Current Newsletter
Dear clients and friends,
At Perseus Wealth it is essential to us that you are well-informed about what is happening in the markets. Here are a few of the critical topics of conversation that may deserve the most attention this month. If you have any questions or would like to expand upon the conversation, please reach out.
What’s Happening: The jobs market continues to show remarkable resilience, many experts believing its strength may actually be too strong. In January, there were 353,000 new jobs added, the largest increase in one year[1] and almost double the expected rate of growth. Wages also grew by 0.6%, giving consumers a boost in spending power. Treasury yields surged immediately following the strong job and income reports (note: increasing rates in treasuries are inverted to the price of existing bonds, therefore yields up = prices down or being sold off), reinforcing the market’s revised expectations of the Fed’s turning more hawkish by maintaining rates higher for a bit longer. This was seemingly confirmed by the Federal Reserve’s recent statement signaling a more cautious (i.e. delayed) approach towards rate cuts, emphasizing the need for sustained inflation trends before adjusting rates, challenging previous market expectations of a March rate cut[2].
In January, the headline Consumer Price Index (CPI) rose by 3.1% compared to the previous year, slightly lower than December's 3.4% but still above expectations[3]. The report also showed core prices, which exclude more volatile food and energy costs, increased by an even greater amount: 3.9% year-over-year. Services, excluding housing, experienced a notable increase of 0.7% month-over-month, while core goods prices fell for the eighth consecutive month. These inflationary trends are closely watched by investors and economists, influencing a huge spectrum of economic indicators including: consumer sentiment, spending levels and patterns, yields, housing, and equity valuations.
Despite concerns over inflation and monetary policy, stock markets have shown remarkable resilience, with every major index hitting new all-time highs this year, as the overall momentum in US stocks since late October has continued so far this year. Unfortunately, this momentum has also pushed up valuations across the S&P 500. The good news is that the fourth quarter’s earnings reports have shown earnings growth of nearly 5% thus far[4]. Nevertheless, the market's focus remains on the Federal Reserve and adjusting expectations of when they may be able to cut rates.
The Bottom Line: Monetary policy expectations continue to shift, particularly on the back of a worse-than-expected inflation report and stronger-than-expected job gains – neither of which is indicative of the Fed’s actions to date having “solved” the inflation issue. There are still multiple significant historical warning signals of the increased possibility of a recessionary outcome from the Fed’s actions and/or inactions: the 16-month-long inverted yield curve, a high and increasing difference in current consumer confidence compared to future expectations, slowing housing starts, decreasing Leading Economic Index for the last 24 consecutive months, etc. These and other indicators demonstrate the highly delicate balance the economy finds itself in and has reignited debate on how successful the Federal Reserve may be in bringing inflation finally below its target rate without doing damage to the jobs market as well as overall economic growth. While there is still cautious optimism in a potential soft landing, the drumbeat supporting a recessionary outcome beginning sometime this year is gaining strength. (And it should also be noted that the organization responsible for making and announcing the existence of a current recession, the NBER (National Bureau of Economic Research), did not make a recession call in 2008, despite the incredibly horrendous economic environment for that entire year, until December 1, 2008, at the same time stating that the existing recession had started 12 months earlier in December 2007! Many feel the delay on the part of the NBER in making the announcement was intentional so as to avoid having a significant impact on the outcome of that year’s election. (Note: 2024 is also a presidential election year…). On a shorter-term basis, the next inflation report and jobs report will be important ahead of the Federal Reserve’s next meeting on March 20th.
Best always,
Sean and John
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested directly. The economic forecasts outlined in this material may not develop as predicted, and there can be no guarantee that any strategy will be successful.
[1] Bureau of Labor Statistics, https://www.bls.gov/news.release/empsit.nr0.htm
[2] CME FedWatch Tool’s probabilities of a rate cut in March as of January 30, 2023
[3] Bureau of Labor Statistics, https://www.bls.gov/news.release/cpi.nr0.htm
[4] Bloomberg analysis as of February 15, 2024