January 15-19, 2024

Tactical Signal 9

The S&P 500 eked out a gain for the week to help normalize the momentum streak. The week ahead, albeit a four-day shortened week, will be important in establishing market sentiment and foundation heading into earnings seasons, starting with the financial sector. Our technical indicators remain in full position (100%).

With the opening of earnings season, we find ourselves at a crossroads where Technology stocks continue to outshine their counterparts in the financial sector. The narrative unfolds with six standout stocks, excluding Tesla, spearheading the charge. Notably, NVIDIA secures the pole position with an impressive gain of +11.43%. However, Tesla faced headwinds, experiencing a dip of (-7.83%) attributed to price cuts and supplier issues.

While major banks reported robust earnings, setting new records before factoring in one-time charges, their forward guidance signals a cautious approach. Citigroup, at the forefront, plans to streamline operations by cutting 20,000 employees over the next two years. This strategic move underscores the industry's awareness of challenges and the need for prudent financial management.

In tandem with corporate earnings, key economic indicators take center stage. The Consumer Price Index (CPI) and Core CPI reveal results surpassing consensus expectations at 3.4% and 3.9% year-over-year, respectively. These elevated figures prompt a reconsideration of market expectations regarding aggressive Federal Reserve rate cuts. Surprisingly, bond yields exhibit a nuanced response, with narrowing observed in shorter-term maturities – 1 year, 3 years, 5 years, and 10 years.

The spotlight remains on the financial landscape for the upcoming week, with leading institutions such as Goldman Sachs, PNC Financial, and Morgan Stanley set to provide crucial guidance moving forward. Simultaneously, pivotal economic indicators, including Industrial Production, Business Inventories, and Housing Starts, promise insights into the economy's trajectory as it navigates toward a 'soft landing.'

"March is too early in my estimation for a rate decline because I think we need to see more evidence. I think the December CPI report just shows there's more work to do and that work is going to take restrictive monetary policy." 

– Fed Reserve Bank of Cleveland President Loretta Mester, Bloomberg Interview, Jan 11, 2024

Bedrock Inflation Up Close

Housing Inflation

December's latest CPI inflation report of 3.4% fell short of consensus and failed to break below the 3% threshold. The question is why inflation has stubbornly taken longer to curb and what will it take to lower inflation. Inflation is correlated to consumer spending. The latest December jobs report added 216k jobs with unemployment remaining above full employment at 3.7%, indicative of strength in the U.S. economy, a negative catalyst to disinflation even after the Fed raised interest rates 11 times since early 2022.

Overall, CPI inflation has slowed with the help of energy prices declining by 2% yoy as Brent Crude oil has fallen below $80 from a high of $94 while food inflation has slowed to 2.7%. Basic food spending at home actually slowed to 1.3% yoy, but with a strong labor market and consumers eating out, spending for Food Away from Home inflation remained above average at 5.2% yoy.

However, CORE CPI, ex-Food and Energy, has stubbornly settled at 3.9% yoy, averaging at 4% over the last 4-month period. This is because the core segments, including the Services sector, have been on the rise at a rate of 5.3%.

A closer look reveals segments attributing to the persistence of inflation, including Rent rising 6.5% yoy and Transportation Services rising 9.7% yoy. Although homeownership has slowed with a rise in mortgage rates, a strong labor market has partially been the reason rental costs have been on the rise, albeit there's a lag in housing supply and leases coming due. The last reported Rental Vacancy Rate in the U.S. was 6.6% as of Q3 2023, below the long-term average of 7.28%. Furthermore, the U.S. Homeowners Vacancy Rate does not help that the share of owner-occupied housing units vacant and for sale is 0.80 versus the long-term average of 1.54%. The bottom line is that there is a housing and rental shortage.

Other core non-discretionary spending items keeping disinflation at bay include Non-Prescription Drugs (+8.3% yoy), Auto Insurance (+20.3% yoy), and even Garbage Collection (+6.5% yoy). At the same time, due to high inflation, 22 states at the start of 2024 are also raising the minimum wage for an estimated 10 million workers, which could lead to an increase in the cost of goods due to transfer pricing.

The Federal Reserve faces challenges, and merely raising interest rates may not suffice to normalize inflation. The cause-and-effect relationship necessitates time for demand to subside and supply to catch up. Lowering interest rates now may exacerbate and re-inflate inflation. The Fed's patience will be tested as it navigates these complexities in pursuing a balanced economic equilibrium. "The price of greatness is responsibility."

Economic Reports 1/15-1/19/24
Select Indices as of 1/12/24

Advisory services offered through Sowell Management, a Registered Investment Advisor. The views expressed represent the opinion of Sowell Management. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and non-proprietary sources that have not been independently verified for accuracy or completeness. While Sowell Management believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and Sowell Management’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements. Investing in securities involves risks, including the potential loss of principal. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles, or from economic or political instability in other nations. Past performance is not indicative of future results.


Sign up for the Week Ahead Market Commentary

Download the Journey Roadmap

Download the Journey Roadmap

Sign up for the
Sowell Summit Event

(Please be sure to click the link on the web page to book your room)

Thank you for registering!

You should receive a confirmation email shortly. Don’t forget to reserve your room through the unique Sowell hotel reservation page. You can extend your stay at the Sowell Summit reduced room rate.