Markets Rise and Dow Hits All-Time High on Inflation Data; Bonds Gain

The Dow (+0.2%), NASDAQ (+1.2%) and S&P 500 (+0.8%) each showed gains last week, with the Dow being the first index to reach an all-time high.  Meanwhile, taxable bonds were up about 0.2% and tax-free municipal bonds continued their momentum by gaining about 0.3%.  The 10-year Treasury yield fell 0.01% to finish the week at 3.90%.  The decreasing Treasury yield is welcome news to home buyers, as that value is used as the basis for establish mortgage rates, which have been declining. 

The markets have been driven by economic reports involving inflation.  If inflation drops to the 2% target level established by the Fed, then their rate hiking campaign should stop, and investors are hoping that the Fed will begin cutting rates in 2024.  Interest rate cuts are viewed favorably by investors, as lower rates are considered favorable for economic growth.  Last week, the Fed-favored inflation gauge – Personal Consumption Expenditures (PCE) – fell by 0.1% over the prior month, the first decline since the early stages of the pandemic in April 2020.  Year over year, the PCE rose 2.6%, compared the prior month’s reading of 2.8%.  These inflation gauges are approaching the Fed’s target of 2%, so they were met favorably by investors.

My favorite economic measure, Leading Economic Indicators (LEIs), declined in November, marking the 20th consecutive month of declines.  Historically, negative LEIs served as a precursor to a recession, and didn’t turn positive until the end of that recession.  See the chart below that shows historic LEIs and how every dip was followed by a recession.  Recessions are indicated by the shaded regions on the chart.  Time will tell to see if this time is different.

^{Content in this material is for general information only and 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 into directly.}

^{The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.}