New All. Time. Highs...

 

 

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Market wrapped up yet another week of gains that saw some major US indices hit new all-time-highs. This despite the US Federal Reserves’ inference that a March rate cut is not their base-case-scenario. Fed Chairman Jerome Powell said Wednesday that the central bank would likely not be comfortable enough with the path of inflation by its next meeting in March to cut interest rates.

The statement came in a news conference where the central bank left its benchmark interest rate unchanged. Powell did say earlier in the news conference that rate cuts would likely begin at some point this year. Coming into the meeting market futures had been pricing in a 50/50 chance that the Fed would be cutting rates in March.

The Fed’s policy statement released earlier Wednesday included several tweaks that suggested the central bank was taking further rate hikes off the table but not yet ready to cut. Powell’s comments appeared to clarify for traders that the stance would continue for at least one more meeting.

The news shouldn’t be entirely surprising. Central Banks around the world were badly burned in late 2021 and 2022 when they thought high inflation would be transitory, then got caught by surprise when it was higher and more persistent than expected. It makes sense that they want to avoid making the same mistake twice.

The central bank’s next two policy decision dates are scheduled for March 20 and May 1. In recent months, traders and Wall Street strategists have focused on those two meetings as likely candidates for the first rate cut, as inflation continues to fall and job growth slows. No, traders see just a 40% chance of a quarter-point reduction as soon as March, but they continue to see five such cuts throughout 2024. Lower rates remain a question of when, not if for markets

Meanwhile despite the inauspicious end to the month on Wednesday, the S&P 500 just completed its best three month rally in nearly four years, up ~15%. In fact there have only been two other instances of bigger three month rallies in the past 15 years: the lift-off from the pandemic bear market low and the lift-off from the credit crisis low in early 2009 so we've just experienced something truly special and rare.

Of course, with the S&P 500 making a consecutive series of new all-time highs it has prompted many to ask if there's much more upside left in this rally. While the sample size is much too small to make any strong statistical inferences the 2009 and 2020 rallies can still provide a decent guide as to how the next few months are likely to play out. For example, the average three-month return in the S&P 500 following those big gains in 2009 and 2020 is +14.41% and the average six-month return is +21.23%. i.e. - despite the big run-up from the late October low it's entirely possible that the S&P 500 continues to power higher in the months ahead.

Adding support to a bullish thesis has been the continued resiliency of the US economy. While there was some uncertainty around economic growth as we entered 2024, the data over the last week showed that the U.S. economy has been firing on all cylinders over the past several months. Two key datapoints exemplified this stronger growth:

• The S&P Purchasing Managers Index (PMI) came in higher than expected, with the manufacturing PMI hitting 50.3 in January, well above expectations of 47.6 and higher than last month's 47.9 reading and reaching its highest reading since October 2022. The latest surprise positive reading may be the first indication that the manufacturing economy in the U.S. is now starting to stabilize.
• 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.

Closer to home, Canadian GDP also came in better than expected this week, topping expectations with a respectable 0.2% advance in November, and the early read for December points to an even sturdier 0.3% rise. If that flash estimate is correct (a rather large 'if'), the economy will have grown at better than a 2% annualized pace over the last three months of 2023. While far from robust growth, it marks a significant pick-up from the stall in activity during the middle six months of the year. Notably, most of the growth in November (and apparently in December too) came from the goods-producing sectors, and particularly manufacturing and resources. Since these sectors are heavily influenced by exports, it seems that the surprising resiliency in the U.S. economy is indeed spilling over into some sectors in Canada.

Source: BMO Economics EconoFACTS: Canadian Monthly GDP (November)

Bottom Line: Canada had a far firmer growth backdrop to end 2023 than expected, and this points to an upward revision to 2024 estimates. In turn, there's also less pressure on the BoC to start cutting any time soon. This solid result, after a long dry spell for growth, affords policymakers the ability to gently push back on easing chatter, as they wait for underlying inflation to come down further.

Source: BMO Economics EconoFACTS: Canadian Monthly GDP (November)

Lastly, we found the below interesting. Of course we aren’t saying the balance of the year is a forgone conclusion, but generally as January goes, so does the rest of the year…

 

 

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