December 2023 Stonemark Market Commentary

Yuletide Bulls

Equities had a strong year after a disappointing 2022, defying predictions of a recession. Not only did the bear market not continue in 2023, but there was also better-than-expected growth, and inflation slowed down, leading to the S&P 500 ending the year positively. In the last month of the year, investors were pleasantly surprised when Fed Chairman Jerome Powell and his colleagues announced a "turtle" dovish pivot at the FOMC meeting, leading to a rally in both stocks and bonds. Chairman Powell's decision to play Santa was based on the macro data.

Economic Data

The Consumer Price Index (CPI) for November increased by 0.1%, slightly more than the forecast of it remaining stable. However, the rise was offset by lower energy and core goods prices, which prevented any major increases across core services prices. The annual rate decreased to 3.1%, which was a relief to holiday shoppers and travelers. The core rate, which excludes food and energy and is tied to the Fed's target rate, rose moderately by 0.3% month-over-month, and the annual rate for Core CPI remained at 4%. The disinflationary process has been faster than what was expected by Fed officials earlier in 2023. If this progress continues, it will favor policy recalibration in the coming year, which markets have eagerly anticipated. Five key elements have already materialized, forming the perfect mix for disinflation going into 2024: slowing consumer demand, declining rent prices, narrower profit margins, moderating wage growth, and higher for longer monetary policy. Barring any unforeseen commodity price shock or recessionary environment, headline and core CPI should hover around the Fed's target of 2% by the end of 2024.

The holiday season brought good news on the job front as the economy added 199,000 jobs last month, which is especially noteworthy since job growth in September and October was revised downward by 35,000 jobs. In November, the private sector added 150,000 jobs, an increase from the 85,000 jobs added in October. The government sector also gained 49,000 jobs. The end of the strikes by UAW and SAG-AFTRA, which negatively impacted the October jobs report, helped lift overall payrolls by about 41,000 in November. Despite some fluctuations in the data, the three-month moving average of nonfarm payroll gains was strong at 204,000 jobs.

The unemployment rate decreased from 3.9% to 3.7%, and the participation rate increased to 62.8%. Additionally, the average workweek length increased by 0.3% compared to the previous month, while wage growth remained steady at 4.0% year over year. The significant increase in the labor supply over the past couple of years has been instrumental in supporting job growth without adding any further wage pressures. Economists predict that weaker labor demand will naturally impact labor supply.

With inflation cooling faster than expected and the labor market showing the strength of the U.S. economy, an early Christmas gift was given to investors by the Fed. In the last Federal Open Market Committee (FOMC) meeting of the year, the decision to hold the federal funds rate at 5.25-5.50% was expected. However, Fed Chair Jerome Powell's dovishness was surprising. He admitted that the Fed is unlikely to hike rates further and said that policymakers are considering cutting rates. This is a complete reversal from past meetings where he had consistently stated that rate cuts were not on the horizon. Perhaps in the holiday spirit, Chairman Powell's candidness brought about euphoria in the markets.

Investors focused on the dot plot in the Federal Reserve's latest Summary of Economic Projections. The dot plot was notably more dovish than the remarks made by Chairman Powell. According to the Federal Open Market Committee (FOMC) members, there will likely be a 75 basis point cut in interest rates next year. The median forecast was a rate of 4.6%, down from 5.1% in September. Additionally, the Fed expects another 100 basis point cut by 2025.

Economic Forecasts

Not all was jolly for December as leading indicators continued to play the Grinch. The Conference Board Leading Economic Index (LEI) for the United States decreased by 0.5 percent in November 2023, reaching 103.0 points. This comes after a downwardly revised decline of 1.0 percent in October. The LEI has contracted by 3.5 percent over the six months between May and November 2023, a smaller decrease than its 4.3 percent contraction over the previous six months (November 2022 to May 2023).

According to Justyna Zabinska-La Monica, Senior Manager of Business Cycle Indicators at The Conference Board, "The US LEI continued declining in November, with stock prices making virtually the only positive contribution to the index in the month. Housing and labor market indicators weakened in November, reflecting warning areas for the economy. The Leading Credit Index and manufacturing new orders were unchanged, indicating a lack of economic growth momentum in the near term."

Despite the economy's ongoing resilience, the US LEI suggests a downshift of economic activity ahead. Therefore, The Conference Board forecasts a short and shallow recession in the first half of 2024.


Looking forward to 2024, the U.S. economic landscape appears positioned for a controlled descent, representing a transition from the fiscal impulses observed during the COVID era to a more stable monetary policy environment. Notably, the abating inflationary pressures should further support the overall economic outlook. We anticipate several potential economic headwinds that warrant careful consideration. Firstly, the specter of persistent inflation looms, posing challenges to the overall economic landscape. This inflationary pressure, if unchecked, could erode the purchasing power of consumers. Moreover, the heightened interest payments and delinquencies stemming from the absence of rate cuts could curtail consumer spending power. The potential ripple effect on various sectors necessitates a nuanced approach in navigating this complex financial landscape. Additionally, we are mindful of the potential impact of slower job growth on both consumer sentiment and business investment. The interplay between these factors has the potential to dampen the willingness of both individuals and businesses to invest and spend in an environment characterized by higher interest rates.

Conversely, positive factors are poised to contribute to economic expansion. Non-inflationary growth is supported by a robust labor market, consumer resilience, and enhanced productivity driven by advancements in artificial intelligence. The anticipation of interest rate cuts, a notable development expected for the first time since 2020, holds the potential to catalyze higher GDP growth and robust market performance in the coming year. Recognizing the potential for volatile relative returns between 2022 and 2023, active management emerges as a strategic imperative for investors in the new year.