The Dow (-0.6%), NASDAQ (-3.2%) and S&P 500 (-1.5%) each started off the year on a sour note, as the indices posted their worst first-week loss since 2016, and ending a 9-week streak of gains. Taxable bonds were down about 1.2% last week, while tax-free municipal bonds were down about 0.3%. The 10-year Treasury gained 0.16% to end the week at 4.04%, crossing above the milestone of 4%.
As we have seen for over a year, it continues to be all about investors guessing the Fed’s next moves with their interest hiking campaign. The Fed has estimated it will cut rates three times in 2024, but the most recent meeting minutes were revealed and implied they still want to keep rates higher for longer and to not rule out another rate hike if the economy (mainly the job market) continues to run hot. In economic news last week, the December jobs data were reported and showed the job market is still running strong with a better-than-expected report, but that same report also lowered the numbers from the previous two months. Regardless, the Fed meeting minutes and the strong jobs report spooked investors, as they sold off both stocks and bonds.
This coming week, more inflation data will be reported. Barring any significant and unexpected inflation data, investors’ eyes will begin to focus on quarterly corporate earnings season that begins in a couple weeks. From a political standpoint, more volatility could ensue as members of Congress return to Washington to work on the budget supposedly due before month end.
The chart below shows the relationship between initial unemployment claims and recessions. As noted by the shaded areas representing periods of recessions, unemployment claims spike during those periods. So, how does one interpret this chart? Does the absence of a spike (typical after raising interest rates) mean that we won’t go into a recession, or that an impending recession (as suggested by other economic data) will spark a jump in unemployment claims? That is an interesting question we have been asking for almost a year, so only time will tell.
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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.