The US stock market will enter the final trading week of 2023 with the whole story coming together.
Inflation data out Friday showed the Federal Reserve continues to close in on its goal of returning inflation to 2% and puts the central bank on the path towards cutting interest rates.
Recession signals remain few and far between. Interest rates have moderated from decade-plus highs reached this fall. The Dow Jones Industrial Average (^DJI) and S&P 500 (^GSPC) are on the doorstep of record highs. And the Nasdaq Composite (^IXIC) is up over 40% this year.
In the week ahead, whether the stock market's rally will result in a record for the S&P 500 — the Dow hit a record last week — should be the highest drama to face investors this week amid a light economic schedule and a barren earnings slate.
Data on home prices Tuesday morning and Thursday's report on initial jobless claims will be the key economic updates on the schedule. No major companies are expected to report earnings.
Markets will be closed for Christmas on Monday.
Inflation nears the Fed's target
On Friday, inflation data showed the Fed taking a crucial step towards returning inflation to its 2% target.
The Personal Consumption Expenditures Price Index showed prices on a "core" basis, which strips out food and energy and is the Fed's preferred inflation measure, rose 3.2% over last year in November. This was the slowest annual increase since April 2021.
But slicing this data more finely reveals the central bank has more or less reached its goal.
On a six-month annualized basis, "core" PCE came in at 1.9% in November.
"This week saw a renewed attempt from some Fed officials to push back against market expectations for interest rate cuts but, with core PCE inflation running at an annualized pace of below 2% over the past six months, this final flurry of hawkishness isn’t fooling anyone," wrote Andrew Hunter, deputy chief US economist at Capital Economics, in a note on Friday.
"There is mounting evidence that the post-pandemic inflation scare is over and we expect interest rates to be cut significantly next year," Hunter added.
That the Fed will be moving to quickly cut rates next year has, in part, been supporting the market's rally in 2023.
And while many investors will remember this year for the AI-related hype that reignited the tech trade after a dismal 2022, the second half of this year has been all about rates.
An autumn swoon in the US stock market coincided with a surge in Treasury yields to 16-year highs as doubts about slowing inflation pressures — and, in turn, doubts that Fed policy would ease from 22-year highs — weighed on markets.
Recent data, along with the Fed's forecasts, put to rest many of these fears.
Chasing 2024
As the stock market has pushed toward record highs to cap 2023, forecasts for 2024 have already become stale.
Last week, the equity strategy team at Goldman Sachs revised their 2024 S&P 500 price target up to 5,100 from 4,700.
When many on Wall Street began rolling out their year-ahead forecasts in mid-November, the market wasn't yet convinced of the path forward for inflation, the economy, and the Fed.
Now, we round out the year with a broad consensus that inflation will ease, the economy will continue to grow, and the Fed will cut rates. In other words, a "soft landing" has become the base case powering markets higher.
And as we round out two of the more adventurous years in recent market history, the team at Bespoke Investment Group on Friday flagged a few market stats that remind us history will likely relegate these post-pandemic spasms to the dustbin.
On Nov. 30, 2023, the S&P 500 closed at 4,567.80. On Nov. 30, 2021, the S&P 500 closed at 4,567.00.
In between, of course, investors endured the S&P 500's worst year in a generation and are on the cusp of seeing the index clinch one of its best five years since the financial crisis. But the further we move past this two-year period where stocks "went nowhere," the less we'll remember of the drama that filled both moments.
In this same vein, Bespoke noted that during 2022's sell-off, the seven largest stocks by market cap in the S&P 500 to start the year lost a collective $4.9 trillion. This year, those same seven stocks have increased their collective market cap by the same $4.9 trillion.
As 2024 approaches, Wall Street forecasts reveal investors will enter the new year with what we'll call cautious optimism. The S&P 500 gains, on average, about 9% per year; most forecasters are looking for something closer to a 5% gain next year.
But as former Yahoo Finance managing editor and TKer publisher Sam Ro has noted, the stock market rarely sees an "average" year. Since 1957, the S&P 500 has gone up 15% or more 33 times. Over the same period, the index has lost ground 15 times.
Against this backdrop, it seems clear Wall Street is again setting itself up to be wrong about where stocks land at the end of next year.
But as Bespoke's data makes clear, aiming for precision in a given year is a fool's errand, anyway — in time, the drama of any one year's gain or loss will be flattened. And the arc of market history bends one way, in the end.
Weekly calendar
Monday
Economic data: No economic data set for release.
Earnings: No notable earnings set for release.
Tuesday
Economic data: FHFA Home Price Index, October (+0.5% expected, +0.6% previously); S&P Case-Shiller Home Price Index, month-over-month, October (+0.6% expected; +0.67% previously); Dallas Fed manufacturing activity, December (-19.9 previously)
Earnings: No notable earnings set for release.
Wednesday
Economic data: Richmond Fed manufacturing activity, December (-5 previously)
Earnings: No notable earnings set for release.
Thursday
Economic data: Initial jobless claims, week of Dec. 23 (210,000 expected, 205,000 previously); Wholesale inventories, November (-0.2% expected, -0.4% previously); Retail inventories, November (+0.2% expected, +0% previously); Pending home sales, November (+1% previously, -1.5% previously)
Earnings: No notable earnings set for release.
Friday
Economic data: Chicago PMI, December (50.0 expected, 55.8 previously)
Earnings: No notable earnings set for release.
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