Economy Keeps Dealing Aces

January 26th, 2024

It was another winning week on Wall Street with the S&P 500 notching another record high and the Dow Jones Industrial Average closing above 38,000 for the first time ever. A better than expected Q4 GDP report combined with slowing inflation and strong earnings results fueled equity markets. Meanwhile, bond investors struggled to reconcile how the overall strength in data would possibly allow the Fed to become more accommodative. The benchmark 10-year U.S. treasury yield fluctuated throughout, but ultimately finished the week relatively unchanged at 4.14%. For the week, the S&P 500 finished higher by 1.06%.

Q4 GDP Beats Estimates

Slowing inflation and consumer spending continued to outweigh high borrowing costs in the fourth quarter. Q4 GDP rose 3.30%, handily beating economists’ estimates for a 2.00% increase. Although growth slowed from Q3’s 4.90%, the back-to-back readings were the strongest since 2014 (excluding the outlier associated with the V-shaped pandemic recovery). Healthy consumer spending, which accounts for 70% of economic activity, rose 2.80% in the quarter. Business investment, the next largest economic driver, rose at a 2.10% clip. Business investment was especially notable because it followed a double-digit increase for that category in the prior quarter. Government spending also rose during the quarter, up 3.30%. This was slower than Q3’s increase of 5.80%, but still incredibly strong. Inflation, as measured by the personal consumption expenditures – the Fed’s preferred measure – continued to trend lower in the fourth quarter. The headline figure showed inflation grew 2.6% from a year earlier (well below the 5.4% recorded in 2022), while the core grew 2.9%. Importantly, the rate of deceleration increased in the second half of the year with the core reading growing just 1.5%-1.9% over the last three and six months, respectively. That puts the rate of inflation around the Fed’s 2.00% target level, which will likely make the Fed comfortable enough to change the tone in their statement following next week’s FOMC meeting.   

Early Indicators of Rising Momentum

Even while the markets and the economy were rallying in the fourth quarter, the consensus was that a slowdown would materialize in Q1 2024 that would allow the Fed to move to a more accommodative posture. However, early indicators do not suggest a slowdown is materializing. In fact, the S&P flash PMI reports, which are good forward indicators of demand, point to growing momentum thus far in January. The S&P flash U.S. services PMI rose to a seven-month high of 52.9 in January from 51.4 in the prior month. Numbers above 50 indicate expansion while numbers below signal contraction. Meanwhile, the struggling manufacturing sector showed signs of life, jumping to a 15-month high of 50.3 this month from 48.2 in December. The reports also showed new orders, a sign of future sales, increased for both goods and services in January. Business confidence also hit a 20-month high. The ISM releases in the coming weeks should provide further confirmation of growing underlying demand. 

Final Thoughts

This is not the economy that analysts expected we’d have a year ago when markets were fretting over a hard landing. The resilience in consumer demand, the strength in corporate earnings, and the rate that inflation has managed to fall to targeted levels has surprised virtually everyone.  As Beth Ann Bovino, chief economist at U.S. Bank, put it, we’re experiencing a “supersonic Goldilocks”. The conventional thinking is that with inflation now whipped (so far as this week’s PCE report has been interpreted) the Fed has all it needs to feel comfortable bringing rates down. To the degree rates were raised to parry rising prices on the upside, many believe the same should hold true now that inflation has fallen. Leaving rates at current levels as inflation falls essentially raises real rates within the economy– increasing the headwinds to earnings and growth because the topline tailwind inflation had provided is now gone. The Fed will almost certainly lower rates in the coming months, but it will be interesting to see if they do as much as anticipated. Thus far, the Fed’s restrictive policy has not been all that restrictive, and while the policy goal of reducing inflation has been achieved, why return to an abnormally low-rate environment (by historical standards) absent some signs of deceleration? As a value manager, we appreciate higher rates. 4-5% rates are only high compared to modern history, and raising the cost of capital instills discipline on the part of corporations and consumers, tempering speculation and more fairly compensating savers. Returning to a low interest environment encourages risk taking and leverage. One only has to look at the $4 billion that has piled into tech funds alone over the two weeks ended Jan 17th to find evidence of speculation on rates. These inflows have resulted in the technology sector now accounting for over 30% of the S&P 500’s weighting – its highest weight since 2000 and nearly 2 ½ times the weighting of the next closest sector (financials). Microsoft, Apple, and Nvidia account for over half of that 30% (17.9%). Looked at slightly differently, the Magnificent Seven, comprised of Google parent Alphabet (communications sector), Amazon (consumer discretionary sector), Apple (information services), Meta (communications), Microsoft (information services), Nvidia (information services), and Tesla (consumer discretionary), combined account for nearly 27% of the S&P 500.  Alphabet, Microsoft, and Meta all closed at all-time highs this week in anticipation of their earnings announcement next week and more importantly the expectation that we are headed back to the low, low rate environment enjoyed earlier in the decade. With this week’s inflation reading having cleared the way, the rally is entirely reliant on rate cuts happening in the first half of 2024. While no cuts are expected next week following January’s FOMC meeting, investors are hoping the Fed will still deliver a few aces by signaling their intent to do so in the near future when they release their official statement.

The Week Ahead

Bulls have their eyes on more records as markets look to close January on a high note. February comes in roaring like a lion with big reports on nonfarm payrolls and manufacturing.  FOMC meeting on Tuesday and Wednesday will be the main event. No rate cuts expected, but a change in tone within the Fed’s official statement is anticipated.

Mobile Security Measures to Help Protect Your Finances

As advisors, we are committed to helping our clients preserve and protect their financial lives, and we’ve been following a series in the Wall Street Journal (WSJ) about how Americans are falling victim to a growing crime of mobile phone thefts where thieves use stolen phones to hack into financial accounts and steal money. Research indicates that 63% of smartphone users have at least one financial app on their phone.  These apps are a wonderful way for users to stay on top of their financial and investing goals and to conveniently check balances, make deposits, pay bills, and transfer money. However, the WSJ sheds light on ways to safeguard our phones.

The WSJ explained that thieves try to figure out a victim’s passcode, the four- to six-digit number used to unlock a phone’s screen. Criminals may film or watch a potential victim enter the passcode on a device in a public area, such as a restaurant, coffee shop, or bar, employing “shoulder surfing” (looking over someone’s shoulder) to learn their passcode. Another method of learning passcodes is through social engineering where a criminal may befriend a victim or manipulate them in some way into opening an app where they can see the victim enter the code. Once a thief figures out a passcode, they will steal the target’s phone – either forcefully or perhaps without a victim being aware their phone has been stolen. With the phone and passcode in hand, the thief can steal a victim’s entire digital life. For iPhone users, there’s a feature that allows forgetful customers to use their passcode to reset the Apple account password. Once a thief unlocks a phone, they can potentially change the password, thus locking the victim out of their account. The thief can then access the phone’s financial apps since the passcode can often unlock access to all of the device’s stored passwords or provide access to passwords a user may have saved on their phone.  A similar vulnerability exists in Google’s Android mobile operating system. 

A thief can also disable “find my phone,” force sign out of trusted devices (such as a laptop or iPad that the victim might try to use to regain access), and change the email address and phone number associated with the account. Thieves will access payment apps like Venmo, PayPal, Apple Cash, and Apple Pay, and open credit cards using personal information found on the phone. Some victims have not only lost thousands of dollars but also permanently lost access to decades worth of photos, notes, videos, and other important and precious personal information.

Earlier this week, Apple announced a new feature in the latest software release in iOs 17.3 that can protect a user’s phone if it is stolen along with the passcode. If a user enables this feature and if a thief stole their phone, the thief would need more than just the passcode to change settings and access secure information. If the new Stolen Device Protection feature is enabled, the iPhone will restrict the passcode’s power over certain settings when the phone’s owner is away from a location familiar to the iPhone, such as home or work.

The new feature has two levels of protection:


1. Biometric. To access saved passwords or saved payment methods, the phone would require either Face ID or Touch ID. The passcode would no longer be available as an alternative.

2. Biometrics and a delay. To modify more sensitive settings, such as changing an Apple ID password or disabling the find feature, two additional steps would be required. The iPhone would ask for a Face ID or Touch ID verification, then start a one-hour countdown. After the delay, it would ask for another biometric confirmation, such as Face ID or Touch ID. The thief would need to go through these steps to turn off Stolen Device Protection as well.

Experts advise covering your phone screen in public if you have to type the passcode, relying on Face ID or Touch ID whenever possible, adding a separate, unique passcode to apps such as Venmo and PayPal, and deleting scans of sensitive information such as a passport or credit cards. These recommendations are by no means exhaustive, but hopefully they serve as a helpful reminder to remain vigilant.























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