Pundits, analysts and investors had spent the first half of February flailing their arms over the most recent Consumer Price Index (CPI) and retail sales reports that showed prices growing faster than expected in January, walking back expectations for Federal Reserve rate cuts.

​[Goldman Sachs economists have dropped expectations for Federal Reserve interest rate cuts in 2024 to four from five previously, with the first reduction not coming until June.]

A slew of generally good corporate earnings reports kept hope alive, but in fits and starts. Amazon and Meta, for example, beating expectations. But Apple reporting weakness in the Chinese market. Talk of a market rally running out of steam became pervasive on the business channels. 

January gave a gentle push to the popular indices. Despite today’s selloff, at the close the S&P 500 and the Nasdaq-100 are up +1.60% and +1.82% respectively to begin the year.

Of course, to get a more complete picture, it’s helpful to look at some other data – for example, the S&P 500 equal weight index. It’s actually down -0.87% for the year. ​

​That signals to me the “Magnificent Seven” [Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta Platforms, and Tesla] continues to throw its weight around disproportionally, accounting for the vast majority of the strength in the market.
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In addition to marking the start of the year, January saw a few additional beginnings worth noting:

Santa delivered. So did the Fed.

I can’t speak for Santa, but Fed Chair Jerome Powell had this to say mid-month after the latest Fed policy meeting. “I think it’s really good to see the progress that we’re making. If you look at the ... six-month measures, you see very low numbers.”
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That’s right, what you read was optimism. That tone, coupled with rate-cut projections for 2024 and whatever contribution Santa made, sent the market soaring. 

The Nasdaq is now on pace for its best year since 1999. Well and good. But if you zoom out just a little bit and look at the performance of the index over the past two years, you’ll see quite a different story. 

Old joke. Why did God create economists? To make weather forecasters look good.
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A little over a year ago, the Wall Street Journal’s Economic Forecasting Survey, an annual event tapping the brainpower of over sixty academic, business and financial economists, looked into the near-term future and saw nothing but trouble.

• GDP would shrink in the first half of the year (2023).
• Job growth would turn negative.
• A recession was baked in.
• A ‘soft landing’? Forget about it. It was a mythical creature.

 
​All this in response to the Fed’s fight to bring down inflation. Looking back, you couldn’t blame them for their negativity. ​

It has been a dismal October with Treasury yields surging to multiyear highs and the S&P 500 benchmark set to close out its third-straight negative month. The tech-heavy Nasdaq has declined more than 3% month to date, and is also on pace for its third negative month in a row.
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The “Magnificent Seven” used to refer to the 1960 Western film featuring Yul Brynner, Steve McQueen, Charles Bronson, and 4 other leading men of the day.

​But stock market investors in 2023 recognize the term as the set of seven big tech stocks, namely Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta Platforms, and Tesla. It so happens they occupy the top spots in the S&P 500 index, as well as the Nasdaq. 

September is poised to deliver the S&P 500’s worst monthly performance of 2023 -- a 5% drop.

​The Nasdaq Composite is down 6.5% with big-cap tech names taking it on the chin (Apple down 10%, Nvidia – darling of AI – down 11%, Netflix down 14%). Even the stalwarts of the Dow Jones Industrial Average are down a collective 3.4%
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Hedges have been hard to come by: the long-duration bond fund TLT lost almost 7% for the month; the gold fund GLD clipped for 4%. One bright spot -- the U.S. Dollar. 

Last month’s newsletter had this: “While historical stats favor an advancing bull through the end of the year, a 5-7% pullback in the coming weeks/months would not surprise many market analysts.” Those ‘many market analysts’ probably didn’t see it coming in hours/days. But that’s pretty much what happened.

It started on just the second day of the month. American credit rating agency Fitch Ratings downgraded U.S. debt to AA+ from the highest AAA. In the process, it delivered a dressing down to the U.S. political system and the country’s fiscal policy, citing “a steady deterioration in standards of governance.”
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Predictably, markets slumped, with the Nasdaq falling more than 2%, logging its worst day since February. 

​As anticipated, the Federal Reserve pushed its key policy rate to a 22-year high last week with another 0.25% interest rate hike. But investors are betting that might be it for a while.

​July delivered data showing U.S. consumer sentiment rising and inflation easing, adding to growing optimism that the economy will avoid a recession and encourage the Federal Reserve to end its cycle of interest rate increases. 

​Midway through the month, the S&P 500 finally exited out of the longest bear market since 1948.

​That doesn’t mean it’s reached new highs, only that the benchmark index closed up more than 20% off the low it hit last October, entering the classic definition of bull market territory – or at least the definition of some market participants. 

As If On Cue…

The investing world has been consumed this past month with talk of debt ceiling negotiations and artificial intelligence.

Debt Ceiling and Default
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With market anxiety increasing daily as the deadline toward a default grew closer, President Biden and House Majority Leader McCarthy reached a consensus Saturday evening to increase the country’s debt ceiling in return for [see fine print, somewhere]. Congress is expected to read said fine print and vote on the proposed legislation as early as Wednesday.