Stocks may have ended Friday trading somewhat mixed, but the market ended the second week of the new year in positive territory as investors got further confirmation that the long-awaited Fed policy shift was indeed on its way.
Wholesale prices are unexpected rejection The wholesale price index rose 0.1% in December, sending a positive signal for inflation, according to data released by the Labor Department on Friday. The Fed’s preferred inflation gauge, the producer price index, fell 0.1% in December. That compares with an expected 0.1% increase and a 0.1% decline in November (revised from 0.0%). As it stands, wholesale prices are up just 1.0% year-over-year, well below the 1.3% increase expected. For comparison, the index was up 6.4% in 2022.
Meanwhile, the final demand measure excluding food and energy rose 2.5% for the full year 2023, compared with a 4.7% increase in 2022. Given the dramatic improvement in inflation seen over the past year, and especially since the highs of 2022, markets are now celebrating a much-needed soft landing from the Fed. Moreover, Friday’s report also said: Final demand price Goods fell 0.4% in December, the third consecutive month of decline.
As we move into the second half of 2024, price pressures, particularly from the supply side, appear to be subsiding. Equally encouraging is that in the services sector, which the Fed closely monitors, prices have remained stable for three consecutive months. Putting all this together, it seems the Fed is not only done hiking interest rates, but is strongly expected to cut rates at least once in the first quarter of 2024.
According to CME Group’s FedWatch tracker, the federal funds rate futures market is pricing in about a 70% chance of a rate cut at the March meeting. At this point, it’s not hard to imagine the possibility of three more rate cuts by the end of the year. As for the stock market’s reaction, there was still some profit-taking on Friday. The Dow Jones Industrial Average fell 118.04 points, or 0.31%, to close at 37,592.98. The S&P 500 gained 3.59 points, or 0.08%, to close at 4,783.83.
Meanwhile, the tech-heavy Nasdaq Composite Index rose 2.58 points, or 0.2%, to close at 14,972.76. The Dow was up 0.34% for the week, while the S&P 500 was up 1.84% for the week. However, the Nasdaq was the strongest performer, gaining 3.09% through Friday’s close. As for the market’s future direction, many questions will be answered in the coming weeks as fourth-quarter earnings reports approach, especially as the crucial holiday shopping season approaches.
Another key area the market will be watching is whether the big tech companies can continue to rise, especially the “Magnificent Seven.” These mega-cap tech companies — Alphabet (GOOG, GOOGL), Amazon (AMZN), Apple (AAPL), Meta Platforms (META), Microsoft (MSFT), Nvidia (NVDA), and Tesla (TSLA) — are poised to be winners once a rate-cutting cycle begins.
That said, the enthusiasm around the Magnificent Seven stocks raises the question of whether there’s room left for further upside in 2024. And it’s a legitimate question. These stocks accounted for roughly 60% of the S&P 500’s 24% total return last year. Tesla doubled in value, rising 105%, and Meta enjoyed a staggering 193% return. And then there are last year’s AI darlings, Microsoft and Nvidia, the latter of which generated a staggering 243% return in 2023. Investors will want to know whether both Nvidia and Microsoft can continue to drive the AI-related resurgence the market has enjoyed over the past year.
What makes investors bullish about the possibility that there is still significant room left for the “AI deal” — or how much? — are questions both companies must answer to maintain momentum. Naturally, in valuing the Magnificent Seven, investors are wondering whether there is still room to make profits in 2024. But while their combined valuations may be a bit overvalued, for now, hanging on to these winners seems like the best strategy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
/cdn.vox-cdn.com/uploads/chorus_asset/file/25697397/STK071_APPLE_N.jpg?w=150&resize=150,150&ssl=1 "Apple is reportedly working on developing “LLM Siri” to compete with ChatGPT")
