The Federal Reserve's favorite inflation indicator, the PCE Price Index, will be released by the BEA this morning. The index differs from the better-known Consumer Price Index because its composition is changed more frequently and is thus quicker to reflect the impact of real-time pricing fluctuations. In the most-recent report, through February, PCE inflation was reported at 2.5%; by comparison, the latest CPI report, through March, had inflation at 3.5%. Core PCE, which removes volatile food and energy prices, was 2.8% in the latest month, down from 2.9% in the prior month. Our PCE forecasts call for 2.7% for the headline number and 2.8% for the core reading -- roughly in line month-to-month as progress toward the Fed's 2% goal gets harder as the target gets closer. Overall, inflation in this cycle peaked in summer 2022 and has been on a downward trek until plateauing recently. We track 20 inflation measures on a monthly basis. On average, they are indicating that prices are rising at a 2.3% rate year-over-year, up 30 basis points versus a month ago. The numbers are distorted somewhat by ultra-low readings within the Producer Price Intermediate Goods category, which are falling at a 7% rate and may well point to easing prices across the inflation spectrum in the months ahead. Focusing on core inflation -- which we obtain by averaging Core CPI, market-based PCE Ex-Food & Energy (from the GDP report), the five-year forward inflation expectation rate, the 10-year TIPs Break-even Interest Rate, and the PCE Price Index -- our reading is 2.9%, up 12 basis points month-over-month. That's higher largely because sticky prices like shelter and transportation continue to escalate (the Sticky Price Core CPI Index reading is currently 4.5%, up from 4.4% a month ago). Investors are expecting that the Federal Reserve's series of rate hikes ultimately will tame inflation, with the five-year forward expectation rate at 2.38%.

According to the advance estimate released today by the Bureau of Economic Analysis, U.S. Gross Domestic Product expanded in the first quarter at an annualized rate of 1.6%. That's well below the 2.5% consensus and 3.4% growth in the fourth quarter. Personal consumption expenditures were up 2.5%, but that number may not be as solid as it appears. The consumer category was carried by the huge services category, which was up 4.0%. Consumer spending on goods declined 0.4%, which may worry the Fed. Within goods, nondurable goods were flat but durables were down 1.2%. We believe weakness in big-ticket categories such as furniture and household equipment is a sign that many consumers are feeling the weight of still-high food prices and record credit-card rates. Within this context, it may seem surprising that residential fixed investment (housing) was up 13.9%. We believe the answer is that the big Millennial generation is coming of age and forming households. With the inventory of existing homes constrained as owners are locked in with low mortgage rates, prospective buyers are turning to the new-home market. The GDP report also contains data on inflation, which, consistent with recent reports, came in hotter than we hoped. The PCE Price Index increased 3.4% in the first quarter, compared with an increase of 1.8% in the fourth quarter. Excluding food and energy, the index increased 3.7%, compared with an increase of 2.0% in the previous quarter. In our view, the report this morning indicates that many consumers are feeling the weight of inflation that is lingering the after Fed's 11 rate hikes. After the report, futures on the S&P 500 fell. The yield on the 10-year Treasury note rose, probably on the inflation numbers. Based on futures trading, there was little change in the expectation that the Fed will maintain its 5.25%-5.5% policy target at its meetings in May and June. Futures continued to show that the chance of a rate cut in September is slightly better than 50%.

Innovation may be hard to define -- but to borrow from former U.S. Supreme Court Justice Potter Stewart, you know it when you see it. The United States economy is full of innovation. It has to be. Manufacturing industries that dominated the economy decades ago - textiles, televisions, even automobiles, to a large degree - have moved overseas, where costs are lower. Yet the U.S. economy, even during the pandemic and the current period of high inflation, has expanded to record levels. If U.S. corporations weren't innovating, creating new products (such as vaccines) and services (such as Zoom calls), and moving into new markets and applications, the domestic economy would not be growing, and capital would not be flooding into the country. Consider that U.S. GDP was approximately $1 trillion in 1930, but was almost $28 trillion at the end of 2023. That's growth of almost 30x. Meanwhile, the U.S. population has grown less than 3x during that time span, to 332 million people from 120 million. The delta between the GDP growth and the population growth is in large part innovation. To take advantage of the key theme of innovation, Argus has identified approximately 30 companies within its universe of coverage that have been combined to form a diversified portfolio, featured in a recent edition of our Theme Model Portfolio series. Most of the companies in the portfolio, which is sponsored by Smart Trust Inc. as the Argus Modern Innovators Unit Investment Trust, are not start-ups -- but are mature companies. They innovate by disrupting industries, launching new products, being first to new markets, and improving existing products and processes.

After a calm first quarter, when the VIX Volatility Index averaged a low 13.5, the closely watched "fear index" has jumped five points in April and the S&P 500 has slipped 5%. Are we headed for a market correction or even a visit from the bear? After a remarkable 27% run from late October 2023 through March, stocks appear to be reacting to some of the risks we have highlighted for 2024, such as geopolitical developments (Mideast, Russia, China), high interest rates (the Fed hasn't cut yet), the chance of recession (the yield curve is still inverted), stubborn inflation, and the upcoming 2024 U.S. presidential election. On the positive side, we continue to anticipate that the U.S. economy will avoid a recession into 2025, the Federal Reserve will start to lower interest rates later this year, and earnings growth is poised to accelerate over the next few quarters. All that said, the current VIX reading is around 18.5, which is below the 15-year average of 20.5 and signals that investors aren't overly worried (yet) about the outlook. This reading compares to the average VIX of 24 during the most-recent bear market and 35 during the financial crisis of 2008-2009. During the long bull market in the 2010s, the VIX averaged 18 and even touched lows below 10 in 2017. We continue to think that the S&P 500 is in the early innings of a new bull market that dates to October 2022. And while the path for equities won't be straight up, we suggest investors over-weight their portfolios toward stocks at the current market and economic juncture.

With divergent expectations for Fed policy roiling the markets, a systematic approach to understanding potential actions is more important than ever. The Fed's Monetary Policy Report contains a section on "Monetary Policy Rules." The March 2024 section says, "Policymakers regularly consult the prescriptions of a variety of simple interest rate rules without mechanically following the prescriptions of any particular rule." The report also says, "The policy rates prescribed by these rules have now declined to values that are close to the federal funds rate." In a 2016 speech, Loretta Mester, the president of the Cleveland Fed (and a current FOMC voting member) said "I believe in a systematic approach to monetary policy, but I don't believe we are at the state of knowledge where we can choose a single policy rule to set policy because no rule works well enough across a variety of economic models and in a variety of economic circumstances." The Cleveland Fed's website provides seven "Simple Monetary Policy Rules" and three sets of forecasts for economic conditions. Our chart provides the median funds rate from these scenarios (currently 5%) along with the seventy-fifth and twenty-fifth percentiles of estimates from the array of calculations. The current target range is 5.25%-5.5%. The best-known Monetary Policy rule is a formula developed by Stanford economist John Taylor. In a 2015 commentary for the Brookings Institution, former Fed Chair Bernanke offered the following. "The (original) Taylor rule predicts that the FOMC will raise the federal funds rate (tighten monetary policy) by one half point: for each percentage point that inflation rises relative to the Fed's target, assumed to be 2 percent; or for each percentage that output rises relative to its potential." The Atlanta Fed's website has a Taylor Rule utility that can be customized. We expect the Fed to start reducing rates in the second half of this year to 5.12%.

Demand from all corners of the globe for the safety and security of U.S. Treasury debt has acted to keep a lid on long-term interest rates, even as the Federal Reserve has raised short-term rates aggressively over the past two-plus years and inflation has remained stubbornly high. Total public debt owed by the U.S. federal government was $34 trillion at the end of 4Q23, according to the DOT. Outside of U.S. investors, the two largest holders of U.S. public debt are Japan, which owns 3.4% of the debt, and China, which owns 2.3%. The other nations among the top 10 holders have 8% of the debt, so the top 10 holders collectively own about 14%. The grand total of U.S. debt owned by foreign holders is $8.0 trillion, or about 24% of the total. This absolute holdings level has increased 200 basis points over the past six months. Japan has been a leader here, as the nation's holdings have increased by 6%, or $55 billion in the past six months. China, meanwhile, has been selling, in part for political reasons. China's current Treasury holdings are lower by about $65 billion over the past year. Over in Europe, countries such as England, France, and Luxembourg have been buyers. We think this type of global demand for U.S. Treasuries should help keep a lid on long-term rates in 2024-2025.

Homebuilder confidence was unchanged in April after four consecutive increases, according to the recent National Association of Home Builders/Wells Fargo Housing Market Index. The index value was 51. A reading over 50 indicates that more builders see conditions as good than poor. NAHB Chairman Carl Harris said that many "frustrated buyers" were "back on the fence waiting for interest rates to fall." The NAHB's Chief Economist, Robert Dietz, said: "April's flat reading suggests potential for demand growth is there, but buyers are hesitating until they can better gauge where interest rates are headed," On April 8, Fannie Mae released its Home Purchase Sentiment Index for March, which declined after three consecutive increases. The company's Chief Economist, Doug Duncan, said: "Consumers took a slightly more pessimistic view on the likely direction of mortgage rates, likely reflecting the fact that actual mortgage rates have moved upward since the start of the year." The 30-year mortgage rate rose to 6.88% last week from 6.62% on January 4, according to Freddie Mac. On Tuesday, the Commerce Department reported March Housing Starts of 1.32 million at a seasonally adjusted annual rate, down 4.3% from a year earlier. This morning, we expect the National Association of Realtors to report March Existing Home Sales of 3.9 million (SAAR), down from 4.35 million in March 2023. On April 23, we expect the Commerce Department to report March New Home Sales of 672,000 (SAAR), up 5.0% year-over-year. Based on the April 16 GDPNow estimate from the Atlanta Fed, first-quarter GDP is expected to rise 2.9%, with positive contribution from residential fixed investment. The S&P/Case-Shiller National Home Price Index jumped 6.1% in December. We expect it to rise about 4% for February. The Zillow Home Value Index was up 3.6% in February. The 10-year Treasury yield is a benchmark for mortgage rates. It disconcertingly rose to 4.60% yesterday from 3.95% on January 2.

The yield curve has been inverted for months. But what has changed over the past year is that the inversion isn't as steep. Back in April 2023, two-year Treasury note yields were about 100 basis points above 10-year yields. Now that gap is 40 basis points. There are a few reasons for this change, and they point toward an upcoming shift to a normal upward-sloping curve in the next few quarters. First, U.S. economic trends have been positive. Fixed-income investors have moved away from fears of deflation and are again seeking a premium in yields versus inflation. That has lifted rates across the yield curve. Second, the Federal Reserve finally is in front of the inflation curve. The central bank is now building a cushion, or a gap, between fed funds and core PCE in order to push inflation back toward 2.0%. That is all well and good -- but if the Fed's gap is too wide for too long, the central bank risks tipping the economy into a recession. Fed Chairman Powell has explained to financial markets that he and his colleagues want to continue fighting stubborn inflation, so they are likely to keep short-term rates high for a period of time, which is where the markets are now. But the day will come when the data shows that the central bank has inflationary pressures at bay, and it will then start to lower rates in order to keep the economy growing. We think that first rate hike will be mid-year. The recent higher-than-expected CPI and PCE reports are pushing out our calls for further rate hikes a few months, but we think that the yield curve will be largely flat by year-end. Then, as the Fed plans to cut further, we think the curve will resume its normal upward slope in 2025.

The yield curve has been inverted for months. But what has changed over the past year is that the inversion isn't as steep. Back in April 2023, two-year Treasury note yields were about 100 basis points above 10-year yields. Now that gap is 40 basis points. There are a few reasons for this change, and they point toward an upcoming shift to a normal upward-sloping curve in the next few quarters. First, U.S. economic trends have been positive. Fixed-income investors have moved away from fears of deflation and are again seeking a premium in yields versus inflation. That has lifted rates across the yield curve. Second, the Federal Reserve finally is in front of the inflation curve. The central bank is now building a cushion, or a gap, between fed funds and core PCE in order to push inflation back toward 2.0%. That is all well and good -- but if the Fed's gap is too wide for too long, the central bank risks tipping the economy into a recession. Fed Chairman Powell has explained to financial markets that he and his colleagues want to continue fighting stubborn inflation, so they are likely to keep short-term rates high for a period of time, which is where the markets are now. But the day will come when the data shows that the central bank has inflationary pressures at bay, and it will then start to lower rates in order to keep the economy growing. We think that first rate hike will be mid-year. The recent higher-than-expected CPI and PCE reports are pushing out our calls for further rate hikes a few months, but we think that the yield curve will be largely flat by year-end. Then, as the Fed plans to cut further, we think the curve will resume its normal upward slope in 2025.

The large number of security breaches in recent years forced businesses and governments to invest heavily in cybersecurity services. Cybercrime cost the world an estimated $6 trillion in 2021, compared to $3 trillion in 2015, according to Cybersecurity Ventures. As such, cybercrime represents one of the largest transfers of wealth in the history of humankind. The threat to critical infrastructure as well as threats to national security prompted the U.S. government to create the Cybersecurity and Infrastructure Security Agency (CISA) in 2018. The agency was created to reduce threats to U.S. physical and cyber infrastructure, as well as to coordinate cybersecurity efforts to counter private, as well as government-sponsored hackers. The cyber security solutions market, consisting of dedicated hardware, software, and services, comprises a $170 billion annual revenue opportunity. We expect that to grow at more than a 10% compound annual growth rate (CAGR) over the next several years. The market is comprised of several major sub-segments, including network security, endpoint protection, identity, and access management, among others. Despite the influential positions of several cybersecurity titans, the cybersecurity sector remains receptive to new entrants. This is due in part to low barriers to entry, as well the ever-evolving cyber threat landscape, which keeps companies, government agencies, and non-profits on the lookout for fresh tools to combat the threat of data, financial, and reputation loss.

As global markets struggle in the environment of higher interest rates, renewed conflict in the Middle East, and the lingering battle between Russia and Ukraine, one thing has not changed: foreign stocks are cheaper than U.S. stocks. And with the large run-up in late 2023 and first quarter of 2024, U.S. stocks are even more expensive. Consider P/E ratios. The trailing P/E ratio on the S&P 500 is 26, above the global average of 14 and well above the 6-12 average P/Es for stocks in emerging markets. A review of yields tells a similar story. The current dividend yield for the S&P 500 is 1.3%, versus the global average of 2.8% and Asian, Australian, and Latin American yields of 2%-5%. The foreign region that does not completely fit the pattern is the Middle East. The average P/E on a Saudi Arabian stock is a high 18.1 and the yield is a low 2.3%. This can be attributed to high oil prices. Taking a step back, investors generally are willing to pay a higher price for North American securities because of the transparency of the U.S. financial system as well as the liquidity of U.S. markets. What is more, global returns can be volatile across individual countries, given currency, security, political, and geopolitical risks. Indeed, U.S. stocks (ETF SPY) have outperformed EAFE (ETF EFA) over the past year as well as over the past five years. Even so, we recommend that growth investors have approximately 5%-10% of their equity allocations in international stocks to take advantage of the value, and we have been adding global stocks to our Universe of Coverage.

Two important inflation reports were released this week. Both indicated that overall pricing pressures have retreated from peaks in 2022. But both also confirmed that inflation remains above the Fed's target of 2.0% and both indicated that progress to that level may be hard to achieve. Let's first take a deeper dive into the Consumer Price Index. According to the latest CPI report, the overall inflation rate in March of 3.5% was higher than the prior month's rate of 3.2%. That bit of bad news was compounded by a steady reading in the core CPI rate, which excludes the impact of food and energy and rose at an annual pace of 3.8% over the past year. What's propping up core CPI? Two main factors: Transportation Services (+10.7% yoy) and Shelter (5.7%). These elements of the index have prices that don't typically fall sharply. Energy prices are also starting to tick higher. The other inflation report was the Producer Price Index. PPI measures pricing trends farther up the supply chain, at the manufacturing level. Here, we see a modest decline in the rate of inflation on a monthly basis. For example, the core final demand PPI rate for March was 0.2%, compared to 0.6% in February and 0.4% in January. How worrisome is all of this? We have noted for months that progress will be slow for inflation returning to the 2.0% level. And nothing was terribly alarming about either of the reports. Energy prices remain relatively subdued, and prices at the PPI Intermediate demand level -- farther up the value chain -- continue to outright decline. We think the June 2022 CPI rate was the peak reading for the index this cycle, as the housing market cools, supplies of new vehicles are replenished, and the price of oil stays below $90 per barrel. The Fed has lifted the feds fund rate from 0.0% to above 5.25% over the past 18 months, and the rate hikes appear to be reducing inflationary pressures. We look for the U.S. central bank to be lowering rates in 2H24 and 1H25 as their concern shifts more toward economic growth.

In a new performance twist, the top growth-focused sectors are barely beating the market through 1Q24 rather than trouncing it as they did a year earlier. For 1Q24, the best sector performance in the S&P 500 came from Communication Services, up 12%; this sector was also a top performer in 1Q23. But the best performer in 1Q23, Technology, was in fourth place in 1Q24. Tied for second place in 1Q24 were Financial Services and Energy, both up 12%. Technology appreciated 10% in the quarter, which put it just behind the market's 10.2% capital-appreciation gain. Industrial was just behind Technology and the market with a 9.9% gain in 1Q24. Next up was Healthcare, logging 8% appreciation as the medical profession and healthcare industry continue their prolonged transition out of the post-pandemic phase. Three sectors - Consumer Staples, Materials, and Utilities - delivered 5%-7% capital appreciation in 1Q24. Utilities is a favored sector in a declining rate environment, and investors appear to be buying ahead of the anticipated shift to accommodative Fed policy from the current restrictive stance. Consumer Discretionary, one of the better performers in 2023, was eleventh among 11 sectors in 1Q24. The Wall Street narrative is that inflation is in retreat, the economy is strong, and people are employed. But the average consumer is weary and wallet-constrained after two years of inflation. High interest rates are a further impediment to big consumer-durable purchases such as homes and cars, particularly for the middle class and below. This disconnect between the top of the economy and the middle and bottom is likely to feature in the November elections.

The 1Q24 EPS season gets under way later this week, launched, as usual by the earnings reports from the big banks. In the following week, the floodgates will open, with Consumer, Healthcare, and Industrial companies all releasing results. Tech and Energy companies generally report later in the EPS period, and then the Retailers wrap things up, likely in mid-to-late May. Consensus estimates for 1Q24 growth range from mid-single-digits to high-single-digits. This follows 10% growth in 4Q EPS, according to Refinitiv. Leading sectors for 1Q24 are expected to be Communication Services (+27% EPS growth year-over-year), Technology (+21%), Utilities (+19%), and Consumer Discretionary (+17%). On the downside, earnings from the Energy and Materials sectors are both expected to decline 24%. Healthcare earnings are expected to slip 5%. For 2024, our full-year earnings estimate is $247, implying high-single-digit growth from 2023 levels. Remember, companies often exceed earnings expectations. Last quarter, just over four-fifths of companies exceeded consensus expectations; and the average beat against expectations was above 7%. Over the preceding decade, about 75% of S&P 500 companies exceeded expectations; and those companies on average topped consensus quarterly EPS estimates by about 6%.

Our analysis of recent data leads us to conclude that the U.S. economy is healthy and consumers are still leading the way. According to the third estimate released by the Bureau of Economic Analysis (BEA), U.S. Gross Domestic Product expanded in the fourth quarter at an annualized rate of 3.4%, up from the second estimate of 3.2%. Consumer spending, designated as Personal Consumption Expenditures (PCE) in the GDP report, contributed 2.2 points of the 3.4% increase in 4Q GDP. Our 2024 GDP forecast is still for 2.0% growth. We are raising our 1Q24 GDP forecast to 2.4% from 2.3% and lifting our 2Q estimate to 1.5% from 1.3%. Our second half estimate is unchanged. We expect 2Q to be the weakest quarter of 2024, with growth ramping to 1.8% in 3Q and 2.3% in 4Q. On April 4, the Atlanta Fed's GDPNow model estimated 1Q24 growth of 2.5%. Based on our analysis of the Nowcast, we believe that PCE, Residential Investment, Intellectual Property, and Government could all add to 1Q GDP, while Equipment, Nonresidential Structures, Net Exports, and Inventories may detract from or add very little to growth. Our 2024 forecast assumes inflation continues to fall and the Fed has completed its rate-hike campaign, with monetary easing likely to begin in the second half of the year. In recent data, the New Orders component of the ISM Purchasing Managers Index for March rebounded to 51.4 from a contractionary (below 50) 49.2 in February. The headline PMI also rebounded to 50.3 from 47.8. That raises our hopes (slightly) for the manufacturing sector. Our outlook for spending in the huge services category remains positive. The services PMI came in at an expansionary 51.4 in March, although it declined from 52.6 in February. The economy is on a growth path, but the yield curve is still inverted so a geopolitical surprise could trigger a slowdown. While economic growth may be uneven in 2024 and 2025, we believe the Fed has the ability to bolster growth if it falters. Our forecast is for GDP to grow 2.0% on 2025.

The Federal Reserve has an impact on financial markets beyond the direction of short-term interest rates, including an influence on longer-term bond yields and the federal deficit. The Fed recently released its Statement of Operations for 2023 and reported interest income of $175 billion and $1 billion in other income, versus $281 billion in interest expense and $9 billion in operating expense. That's a loss of $114 billion, which adds to the U.S. deficit. The Fed is losing money right now because it earns approximately 2.2% in its securities portfolio and pays out approximately 5.2% for repurchase agreements and excess bank reserves. It may be quite a while before the Fed is able to return to profitable operations In the aftermath of its quantitative easing program to boost the economy during the pandemic, the Fed's balance sheet ballooned from $4 trillion to just shy of $9 trillion in 2022. For the past two years, the central bank has been reducing its asset levels by allowing $60 billion in Treasury securities to mature and $35 billion in mortgage-backed securities to run off each month. This "quantitative tightening" increases the supply of bonds available in the market, but has reduced the Fed's assets to $7.5 trillion. We anticipate the Fed will lower its monthly Treasury cap to $30-$40 billion, reinvesting the remainder into the market at higher rates. Over time, as balance sheet shrinks, the Fed's annual loss should decrease. The central bank certainly has a long way to go, if it ever wants to shrink the balance sheet back to the pre-pandemic crisis level.

The Bureau of Labor Statistics (BLS) reported that the U.S. economy generated a whopping 303,000 new jobs in March, well above our forecast of 180,000 and the consensus of 200,000. February's result was revised lower to 270,000 from 275,000, but gains in February and January combined were revised higher by 22,000. March's increase in payrolls and the revisions to February and January took the three-month average to 276,000, which is above the 12-month average of 231,000 and continues to signal a very robust job market. The unemployment rate dropped to 3.8% from 3.9%, which remains below the threshold for triggering the widely followed Sahm Rule recession indicator. Average hourly earnings increased 12 cents month-to-month and are now 4.1% higher year-over-year (compared to 4.3% in February). The average workweek rose to 34.4 hours in March from 34.3 hours in February. Job gains occurred in healthcare, government, and construction. Employment showed little change over the month in mining, quarrying, and oil and gas extraction; manufacturing; wholesale trade; transportation and warehousing; information; financial activities; and professional and business services. After this morning's report, S&P 500 stock futures rose slightly from pre-release levels. The yield on the 10-year Treasury moved higher to 4.40% from 4.33%. Before the release, futures contracts suggested a 94% probability that the Fed will keep the funds target at 5.25%-5.50% when it meets on April 30 and May 1. After the release, there was little change. The chance that the funds rate will be lower after the June meeting (either by 20 or 50 basis points) dropped to 57% from 64%.

March was another solid month for equity investors, as the S&P 500 advanced 3.1% compared to a 0.6% gain for the fixed-income benchmark ETF AGG. Looking ahead, our Stock-Bond Barometer model modestly favors bonds over stocks for long-term portfolios. In other words, these asset classes should be near their target weights in diversified portfolios, with a slight tilt toward fixed income in light of the recent rally in equities. We are over-weight on large-caps. We favor large-caps for growth exposure and financial strength, while small-caps offer value. Our recommended exposure to small- and mid-caps is 12%-13% of equity allocation, below the benchmark weighting. U.S. stocks have outperformed global stocks over the trailing one- and five-year periods. We expect this long-term trend favoring U.S. stocks to continue, given volatile global economic, political, geopolitical, and currency conditions, as well as the strength of the innovative Technology industry in the U.S. That said, international stocks offer favorable near-term valuations, and we target 5%-10% of equity exposure to the group. In terms of growth and value, growth rebounded in 2023 and outperformed value as interest rates stabilized. Over the longer term, we anticipate that growth, led by the Tech, Consumer and Healthcare sectors, will top returns from value, led by Energy, Real Estate and Materials, due to favorable secular and demographic trends.

Our stock-bond asset-allocation model, which we call the Stock-Bond Barometer, is now indicating that bonds are the asset class offering the most value at the current market juncture. But not by much. Our model takes into account current levels and forecasts of short-term and long-term government and corporate fixed-income yields, inflation, stock prices, GDP, and corporate earnings, among other factors. The model's output is expressed in terms of standard deviations to the mean, or sigma. The mean reading from the model, going back to 1960, is a modest premium for stocks (of 0.16 sigma), with a standard deviation of 0.97. The current valuation level is a 0.14 sigma premium for stocks, which is below the historical average and is not indicating that stocks are dramatically overvalued, even with the S&P 500 having logged all-time highs. Other valuation measures also show reasonable multiples for stocks. The current forward P/E ratio for the S&P 500 is approximately 19.6, which is within the normal range of 13-24 and down from 23 in 2021. The current S&P 500 dividend yield is 32% of the 10-year Treasury yield, compared to the long-run average of 39% and the all-time low of 18% during 1999. Looking ahead, we expect the results from our stock-bond valuation model to tilt toward stocks, as interest rates head lower in 2024 and earnings growth picks up. Based in part on the output from our Stock-Bond Barometer, our current recommended asset-allocation model for moderate accounts is 74% growth assets, including 72% equities and 2% alternatives; and 26% fixed income, with a focus on Core and Opportunistic segments of the bond market.

On Friday, the Bureau of Labor Statistics (BLS) likely will provide continuing evidence that the U.S. job market is healthy. The four-week average of initial jobless claims is running at 211,000, which is well below the 300,000 that might signal a critical weakening in employment conditions. The Layoffs and Discharges series in the BLS Job Openings and Labor Turnover Survey (JOLTS) was 1.57 million for January, below 1.61 million in December and below the average of 1.925 million since late 2000. Consumers aren't seeing much evidence of weakness either, according to last week's report on March Consumer Confidence from the Conference Board. Some 43.1% of consumers surveyed said jobs were "plentiful," up from 42.8% in February. Only 10.9% of consumers said jobs were "hard to get." Consumers' outlook for the job market in six-months softened slightly. While employers are keeping the workers they have, we aren't seeing indications of robust demand for new workers. The Institute for Supply Management's Manufacturing Employment Index was 47.4 for March, improved from February but suggesting a contracting market and soft manufacturing employment when the BLS reports on Friday. Tomorrow, the ISM will report on activity in the services sector, which is an important engine of GDP growth. The ISM Services Employment Index posted a contractionary 48 in February. We expect the BLS employment report on Friday will show that March payroll growth moderated to 180,000, from 275,000 in February, while the unemployment rate remained at 3.9%. We expect growth in average hourly earnings fell by one-tenth to 4.2%, and average hours declined to 34.2 from 34.3. The unemployment rate rose in February, but it did not trigger the Sahm Rule recession indicator. Based on our analysis, the March unemployment rate would need to rise to 4.4% to push the indicator to a recession signal.

Historically, April is the second-best month of the year for stocks. The average gain for the S&P 500 in the month of April since 1980 is 1.70%. We note that market returns in April have exceeded 5% on eight occasions since 1980, including a 9.4% gain in 2009 (as the market was beginning to recover from the financial crisis of 2007-2009), a 12.7% surge in 2020 (as the market started to recover from the onset of the COVID-19 pandemic), and a 5.1% gain in 2021 (as COVID-19 vaccines were rolled out). There also have been some clunkers, including 2002 (-6.1%), 2000 (-3.1%), and 1981 (-2.3%). Last year, stock prices in April increased 0.9%. April is a busy month on Wall Street, as companies report first-quarter results. This year, 1Q earnings are expected to grow for the third consecutive quarter, as the economy continues to expand. Investors will focus on the income statements of the Technology companies, which have led the rally. Interest rates will be an important topic well, as markets process the latest readings related to inflation and also prepare for the Federal Reserve's next meeting at the end of the month. As long as interest rates remain under control, stock investors may be able to build off their 1Q gains.

This morning's release from the Bureau of Economic Analysis (BEA) will be the third, and final, update of 4Q GDP. The update last month indicated 4Q real GDP rose at an annualized 3.2% pace, down from 4.9% growth in 3Q23. The 4Q performance is solid, with contributions from consumer spending, private investment, exports, and government spending. We don't expect a major revision to GDP this morning. Between 1996 and 2022, the average absolute revision to the quarterly percentage change in real GDP was just 30 basis points, according to the BEA. Personal consumption expenditures (PCE) on durable goods increased 3.2%, despite a decline in motor vehicles and parts. Gross private domestic investment in structures rose 7.5% after an 11.2% increase in 3Q and a 16.1% increase in 2Q. A report from the U.S. Treasury Department attributed the recent surge in construction to spending on manufacturing facilities for computers, electronics, and electrical products (bolstered by the CHIPS Act), adding that these categories have become a dominant component of manufacturing construction after a few decades of relatively small share. On April 25, the BEA will release its advance estimate for 1Q GDP. We expect 1Q24 growth to slow to 2.3%. The March 26 GDPNow forecast for 1Q24 from the Atlanta Fed is 2.1%, with an estimate for 1.9% growth in PCE. Residential fixed investment and intellectual property could make strong contributions to 1Q GDP according to the Nowcast. For the remainder of 2024, we expect GDP growth of 1.3% in 2Q, 1.8% in 3Q, and 2.3% in 4Q. Our full year 2024 estimate is 2.0%. Our 2025 estimate is also 2.0. Federal Reserve board members and bank presidents expect GDP to grow 2.1% in 2024, 2.0% in 2025, 2.0% in 2026, and 1.8% in the "longer run," based on the median projections provided at their March meeting.

The Fed's favorite inflation indicator, the PCE Price Index, will be released on Friday even though the NYSE will be closed for Good Friday. The index differs from the better-known Consumer Price Index in that its composition is changed more frequently and is quicker to reflect the impact of real-time pricing fluctuations. In the most-recent report, through January, PCE inflation was reported at 2.4%; the latest CPI report, through January, had inflation at 3.2%. Core PCE, which removes volatile food and energy prices, was 2.8% in the latest month, down from 2.9% in the prior month. Our forecasts call for 2.5% for the headline number and 2.8% for the core reading -- roughly in line month-to-month as progress toward the Fed's 2% goal gets harder as the target gets closer. We track 20 inflation measures on a monthly basis. On average, they are indicating that prices are rising at a 2.3% rate year-over-year, up 30 basis points versus a month ago. The numbers are distorted somewhat by a sharp decline in Producer Price Intermediate Goods, which are falling at an 8% rate and likely point to easing prices across the inflation spectrum in the months ahead. Focusing on core inflation -- which we obtain by averaging Core CPI, market-based PCE Ex-Food & Energy, the five-year forward inflation expectation rate, and the 10-year TIPs Break-even Interest -- our reading is 2.8%, down five basis points month-over-month. That's lower largely because sticky prices like shelter and transportation are starting to ease. Looking down the road, investors are expecting that the Federal Reserve's rate hikes ultimately will tame inflation, with the five-year forward expectation rate at 2.22%.

Small- and mid-cap stocks (SMID stocks) have underperformed large-caps over the past 12 months, but still may be in a better position to generate market-beating returns going forward. For one thing, SMID companies tend to focus on domestic markets, so their businesses could be less disrupted by the fallout from unrest in the Middle East, the Russian invasion of Ukraine, issues with China, or other geopolitical developments. As well, the prices of SMID stocks generally are lower than the prices of large-caps, with the P/E ratio on the Russell 2000 Small-Cap Index of 13 compared to a trailing P/E of 25 for the S&P 500. Finally, there are long stretches in the record books when SMID stocks have outperformed large-caps. From 2003-2021, the Russell 2000 Index had climbed 450%, compared to an advance of 330% for the S&P 500 index. That said, SMID stocks can be risky. The standard deviation for monthly returns was 5.7% for SMID stocks over our 2003-2021 test period, versus 4.3% for large-caps. SMID stocks fell further in negative years during our test period, with an average 15% drop versus a 12% pullback for large-caps. Still, despite the risks, diversified investors look to have exposure to small- and mid-caps based on the long-term performance record. We estimate that 15%-20% of the U.S. stock market's capitalization is comprised of small- and mid-cap stocks. That's generally the allocation we target for our ETF Model Portfolios.

Treasury bond yields have been rising in recent weeks on concerns over stubbornly high inflation. Meanwhile, corporate bond yields have risen, but not as rapidly as Treasury yields, as investors remain optimistic about the potential for economic and profit growth -- and thus lower default rates. As a consequence, spreads between corporate and Treasury bond yields have narrowed. The spread between AAA-rated corporate bonds and 10-year government bonds in February was 82 basis points (bps), below the 35-year average of 123 bps and down 20 bps from December. The gap between the government 10-year bond yield and a BAA-rated bond (still investment grade) in February was 156 basis points, below the historical average spread of 230 bps and down about 25 bps in the past two months. We watch these spreads closely for a few reasons. First, from an asset-allocation standpoint, tight corporate bond spreads signal that corporate bond prices are above historical fair value, and we may look to under-weight the segment in our model portfolios. Next, from a broad market standpoint, the changes in the spreads offer clues to the bond market's view of corporate financial strength, which appears to be improving given the narrowing spreads. This is important as the economy approaches a period of slower growth.

During earnings season, which starts next month, analysts focus on absolute earnings growth -- but also on the quality of the earnings that companies are generating. There are three drivers to EPS growth: higher sales, a wider operating margin, and a reduced share count. A decline in shares outstanding, which is the result of corporate share buybacks, is the lowest-quality driver of EPS growth. Higher sales -- as customers demand and pay for more products and services -- is the highest quality, especially when those sales are driven by an increase in volume. Margin management is in the middle. Consistently wider margins, quarter after quarter, are typically a sign of a good management team, which is more often able to grow revenues faster than it grows costs. But that's a tall order in periods of high inflation (which raises the prices of Cost of Goods Sold) and of high interest rates (which result in higher financing costs). What's more, there's a cap to margins, as they don't rise indefinitely. Indeed, this is one of those statistics for which the concept "reversion to the mean" is relevant. In 2023, operating margins for S&P 500 companies averaged 11.4%. That was above the historical average of 10.3%, but down from 11.5% in 2022 and from a 15-year peak of 13.3% in 2021. It is a fair bet that margins will be under pressure in the next quarter or two due to inflation and high rates. But by the second half of the year, financing costs at least should be somewhat lower. Overall, we look for a modest widening for the S&P 500 operating margin in 2024, and for EPS growth in the 9%-10% range for the year.

During earnings season, which starts next month, analysts focus on absolute earnings growth -- but also on the quality of the earnings that companies are generating. There are three drivers to EPS growth: higher sales, a wider operating margin, and a reduced share count. A decline in shares outstanding, which is the result of corporate share buybacks, is the lowest-quality driver of EPS growth. Higher sales -- as customers demand and pay for more products and services -- is the highest quality, especially when those sales are driven by an increase in volume. Margin management is in the middle. Consistently wider margins, quarter after quarter, are typically a sign of a good management team, which is more often able to grow revenues faster than it grows costs. But that's a tall order in periods of high inflation (which raises the prices of Cost of Goods Sold) and of high interest rates (which result in higher financing costs). What's more, there's a cap to margins, as they don't rise indefinitely. Indeed, this is one of those statistics for which the concept "reversion to the mean" is relevant. In 2023, operating margins for S&P 500 companies averaged 11.4%. That was above the historical average of 10.3%, but down from 11.5% in 2022 and from a 15-year peak of 13.3% in 2021. It is a fair bet that margins will be under pressure in the next quarter or two due to inflation and high rates. But by the second half of the year, financing costs at least should be somewhat lower. Overall, we look for a modest widening for the S&P 500 operating margin in 2024, and for EPS growth in the 9%-10% range for the year.

The Federal Reserve wrapped up its latest Open Market Committee meeting on Wednesday and, as expected, held the current federal funds rate steady at 5.25%-5.50%. The fed funds rate remains at its highest level since 2000 and is above the long-term average of 4.4%. This is the Fed's plan, of course: keep rates high to push inflation lower. In the meantime, inflation has indeed been on a downward trek. The latest core CPI reading was 3.8%, down from 9.1% in July 2022, and the latest core PCE Price Index reading was 2.8%. Yet despite the progress, both are still well above the Fed's target of 2.0%, and the slope of the downward trajectory has flattened out lately. Those are potential problems for a central bank that watched while inflation got out of hand in 2020-2021 and wants to rebuild its reputation as an effective inflation fighter. After this latest meeting, the Fed released its Summary of Economic Projections, which includes its "dot plot" forecasts of potential rate changes in the coming months. Chairman Powell and his colleagues remain on track with a plan to lower rates three times in 2024 and then potentially another three times in 2025. Ultimately, those moves are going to depend on the pace of decline in the inflation rate and any pronounced upward move in the unemployment rate. The good news is that the Fed is already ahead of the inflation curve, and the current real fed funds rate of 2.6% is above the historical average of 1.6%. Equity investors cheered the Fed's plans on Wednesday, lifting market averages to new all-time highs.

When global economic conditions become unpredictable, investors often flock to gold. The yellow metal is trading above $2,100 per ounce. During the first phase of the pandemic, the spot price for an ounce of gold jumped 33% in six months and broke through the $2,000 level. Gold spot prices also spiked above $2,000 in early March 2022 due to the war in Ukraine, and are now at similarly high levels as tension simmers in the Middle East. The current price of gold reflects the perceived safety of hard assets amid the global conflicts, as well as lower U.S. interest rates that tend to weaken the dollar, which is the currency in which gold is priced. The outlook for Federal Reserve rate cuts also helps gold, as lower rates reduce the risk for a global economic recession and thus a potential decline in gold purchased for jewelry. Looking ahead, our forecast trading range for gold in 2024 is $2,200-$1,700, and our average forecast for the year is $2,000. This compares to average gold prices of $1,960 in 2023, $1,873 in 2022, $1,806 in 2021, $1781 in 2020, $1,400 in 2019, $1,265 in 2018, $1,277 in 2017, $1,258 in 2016 and $1,155 in 2015. As long as geopolitics and global economic uncertainty are part of the market conversation, gold is likely to remain at levels well above the historical averages of $1,120 since 2000 and $1,485 since 2010.

Homebuilder confidence rose for a fourth month in March, according to the recent National Association of Home Builders/Wells Fargo Housing Market Index. The index value of 51 was the highest since July. A reading over 50 indicates that more builders see conditions as good than poor. "We expect more consumers to jump off the sidelines and into the marketplace if mortgage rates continue to fall later this year," said NAHB Chairman Carl Harris. On March 7, Fannie Mae released its Home Purchase Sentiment Index for February, which was up for a third consecutive month. The company's economist, Doug Duncan, said that despite the recent "uptick" in rates, consumers remain relatively optimistic that mortgage rates will decrease over the next 12 months. A decline in mortgage rates closer to 6%, which Fannie Mae expected at the time, could lead to a "further thawing of the housing market," Mr. Duncan said. This morning, the Commerce Department will report February Housing Starts. We expect 1.45 million starts at a seasonally adjusted annual rate, up 1.0% from a year earlier. On Thursday, we expect the National Association of Realtors to report February Existing Home Sales of 4.05 million (SAAR), down from 4.53 million in February 2023. On February 25, we expect the Commerce Department to report February New Home Sales of 680,000 (SAAR), up 8.8% year-over-year. Based on the March 14 GDPNow estimate from the Atlanta Fed, first-quarter GDP is expected to rise 2.3%, with a small-but-positive contribution from residential fixed investment. The S&P/Case-Shiller National Home Price Index jumped 5.5% in December. We expect it to rise about 4% for January. The Zillow Home Value Index was up 3.1% in January. The 10-year Treasury yield is a benchmark for mortgage rates. Its decline from nearly 5% in October has lead a 100-basis-point decline in the 30-year mortgage rate, to 6.74%. One risk factor we are watching is that the 10-year has retraced some of that move, rising to 4.33% yesterday from 3.87% on February 1, with a 20 basis point increase last week.

Two recent inflation reports indicated that overall pricing pressures have retreated from peaks in 2022. But both also signaled that inflation remains above the Fed's target of 2.0%. According to the latest Consumer Price Index (CPI) report, the overall inflation rate in January of 3.2% was higher than the prior month's 3.1%. That sour news was offset a bit by a drop in the core CPI rate, which excludes food and energy and eased to 3.8% from 3.9%. Two main factors are propping up CPI: Transportation Services (+9.9% YOY) and Shelter (+5.7%). These categories have prices that don't fall sharply. The other inflation report was the Producer Price Index (PPI), which measures pricing trends farther up the supply chain, at the manufacturing level. Here, we also saw a modest pick-up. The core final demand PPI rate for February was 1.6%, up 60 basis points month-over-month after having fallen from 4.4% a year ago. We have noted for months that making progress on inflation will be hard -- and nothing was overly alarming about either of the reports. Energy prices remain relatively subdued and prices at the PPI Intermediate demand level -- farther up the value chain -- continue to decline. We think the June 2022 CPI rate was the peak reading for the index this cycle, as the housing market cools, supplies of new vehicles are replenished, and the price of oil stays around $90. The Fed lifted the feds fund rate from 0.0% to above 5.25% over the past 18 months, and the hikes appear to be reducing inflationary pressures. We look for the U.S. central bank to be lowering rates in 2H24 as their concern shifts more toward economic growth.

The decline in the "Misery Index" has stalled near 7% in recent months after peaking at 15% at the start of the pandemic and subsequently dropping from 12.6% in June 2022 to 6.7% in June 2023. The index is a measure of consumers' well-being that adds the unemployment rate and the annual inflation rate -- which are important to the Federal Reserve's dual mandate of maximum employment and stable prices. The index was invented by economist Arthur Okun in the 1970s while he was at the Brookings Institution after leading President Johnson's Council of Economic Advisors. To be sure, the index is below the 9.2% average since 1949 and well below "stagflation" peaks around 20% during the Ford and Carter presidencies. The five-year low was 5.2% in September 2019. Recent surveys of consumer sentiment have been volatile, with The Conference Board's Consumer Confidence Index falling in February after three consecutive increases. Actual spending has been choppy too. Retail sales rose 1.5% on a year-over-year basis in February. The result was an improvement from January's flat performance but weaker than December's 5% rise. After the report, the Atlanta Fed's GDPNow estimate for 1Q personal consumption growth declined to 2.2% from 2.9% on March 7. PCE remains the dominant driver of the Nowcast's estimate for GDP to grow 2.3% in 1Q. A risk we have been monitoring is ongoing weakness in big-ticket discretionary spending. Record-high credit-card rates have made consumers reluctant to purchase items that may take months to pay off. Sales at electronics and appliance stores encouragingly turned positive in February, but building materials stores were off 6.1% while furniture and home furnishings stores declined 10.1%. Our analysis of last week's employment report supports our expectation for a mid-year rate cut that could lift discretionary spending. Some improvement in inflation from this week's CPI report would raise our confidence and lower the Misery Index.

Determining a realistic estimate for the size of the Artificial Intelligence industry is a challenge, as there is simply no measurable unit of AI output comparable to barrels of oil or tons of steel. As well, much of the AI development occurs within laboratories and at universities - and results are measured in tangible progress against AI objectives, not dollars or units of output. In the corporate world, nearly all pure-play AI companies service micro-niches, have little measurable revenue, and are deeply unprofitable. Argus believes that much of the revenue and most of the profitability from the AI industry is attributable to several giant U.S. and a few international companies. These primarily operate in growth sectors such as Technology, Communication Services, and Consumer Discretionary. Key companies include Amazon, Microsoft, Apple, Meta Platforms, IBM, Alphabet, Salesforce, Nvidia, and Qualcomm in the U.S. China has Baidu, Tencent, and Alibaba all developing AI solutions. There is also significant activity among companies pursuing advances in IoT, vehicle electrification, autonomous driving, automation, and connectivity for manufacturing, warehousing, construction, and other areas. Argus has derived a model of the size and scope of the global AI industry, based on our coverage of major publicly traded players and most of the mid-tier players, along with our industry knowledge of private players. We estimate the global industry annual revenue amounted to $90-$100 billion in 2021, and expect that to grow at a 40% CAGR through 2030, when it is expected to reach $1.8 trillion. Annual growth is expected to decelerate from the low- to mid-40% range in the immediate years, to the mid-30% range for years toward the end of the survey period.

Determining a realistic estimate for the size of the Artificial Intelligence industry is a challenge, as there is simply no measurable unit of AI output comparable to barrels of oil or tons of steel. As well, much of the AI development occurs within laboratories and at universities - and results are measured in tangible progress against AI objectives, not dollars or units of output. In the corporate world, nearly all pure-play AI companies service micro-niches, have little measurable revenue, and are deeply unprofitable. Argus believes that much of the revenue and most of the profitability from the AI industry is attributable to several giant U.S. and a few international companies. These primarily operate in growth sectors such as Technology, Communication Services, and Consumer Discretionary. Key companies include Amazon, Microsoft, Apple, Meta Platforms, IBM, Alphabet, Salesforce, Nvidia, and Qualcomm in the U.S. China has Baidu, Tencent, and Alibaba all developing AI solutions. There is also significant activity among companies pursuing advances in IoT, vehicle electrification, autonomous driving, automation, and connectivity for manufacturing, warehousing, construction, and other areas. Argus has derived a model of the size and scope of the global AI industry, based on our coverage of major publicly traded players and most of the mid-tier players, along with our industry knowledge of private players. We estimate the global industry annual revenue amounted to $90-$100 billion in 2021, and expect that to grow at a 40% CAGR through 2030, when it is expected to reach $1.8 trillion. Annual growth is expected to decelerate from the low- to mid-40% range in the immediate years, to the mid-30% range for years toward the end of the survey period.

In early March, the Bank of Canada maintained its target overnight interest rate at 5.00% after similar moves in September and December, with the central bank noting that it "remains resolute in its commitment to restoring price stability for Canadians." Consumer price inflation in Canada decelerated to 2.9% in January, but has stayed above the central bank's 2% target -- with the shelter component remaining elevated (due to a housing shortage and higher interest rates) and the biggest contributor to the overall figure. The central bank now sees price inflation staying near 3% until mid-2024, before gradually easing. Meanwhile, Canada's GDP grew by a sluggish 1% in 4Q (after contracting by 0.5% in 3Q), which the central bank described as "below potential." A majority of Canadian economists had been forecasting that the central bank would start cutting interest rates in June, but that has now shifted to July. We believe that select companies in our Canadian coverage continue to offer investment opportunities.

Global economic growth is expected to pick up slightly in 2025, according to the World Economic Outlook from the International Monetary Fund. The moderate acceleration is attributed largely to emerging markets, led by India and China, and also the expectation that global inflation will continue to moderate. In its recent report, the IMF notes "inflation is falling faster than expected in most regions." The world economy is expected to expand 3.1% in 2024 and 3.2% in 2025. Though moving in the right direction, these rates are below the long-term historical global growth rate of 3.8%, due to the impact of inflation and higher interest rates. For industrialized economies (the U.S., Europe, Japan, etc.) growth is forecast at a low 1.5% in 2024, followed by 1.8% in 2025. The U.S. is expected to expand at a pace of 2.1% in 2024, followed by a positive but-somewhat-sluggish 1.7% in 2025. For emerging economies (China, India, Russia, Brazil, Saudi Arabia, etc.), forecasts call for 4.1% growth in 2024 and 4.2% in 2025. The clear leaders are expected to be India and China, with average growth for the two years of 6.5% and 4.6%, respectively, in 2024, with India expected to maintain that pace while China slows to 4.1% in 2025. These growth nations have different drivers: population growth in India and productivity growth in China. We factor these global growth forecasts into our asset-allocation models, and based in part on the slow global growth rates, we continue to recommend that investors over-weight portfolios toward U.S.-based securities. Global stocks generally represent value, but the risks to growth are high.

We have reviewed our recommended sector allocations this month, and based on the analysis we adjusted our current sector recommendations for the calendar second quarter of 2024. Our multi-factor model includes: a performance-ranking system, which assigns points for monthly, quarterly, and YTD sector performance versus the S&P 500; current sector P/E versus 5-year P/E, with points awarded for discount to S&P 500 current versus 5-year P/E delta; two-year earnings growth, with points awarded for exceeding benchmark average and for EPS acceleration; relative performance to the sector group average; sector conviction, meaning BUY rating percentages; and PEG ratio, with points awarded or subtracted based on sector PEG ratios below or above the group average. This time, our process yielded 42 total points, for an average sector score of 3.8. To earn an over-weight designation, sectors had to score five points or above; for market-weight, three or four points; and for under-weight, two points or below. Our current Over-Weight sectors are now Healthcare (raised from Market Weight), Communication Services, Financial Services, and Technology. Our Market-Weight sectors are Consumer Discretionary (lowered from Overweight), Industrials, Real Estate, and Utilities. Our Under-Weight sectors are Materials (lowered from Market-Weight), Energy, and Consumer Staples. Argus suggests investors leverage this consistent and comprehensive process to adjust sector weightings within diversified equity portfolios, with a primary focus on the largest sectors.

The Bureau of Labor Statistics (BLS) reported that the U.S. economy generated 275,000 new jobs in February, well above our forecast of 185,000 and the consensus of 200,000. January's result was revised lower to 229,000 from 353,000, and job gains in January and December combined were revised lower by 167,000. February's increase in payrolls and the revisions to January and December took the three-month average to 265,000, which is still above the 12-month average of 230,000 and signals robust hiring. The unemployment rate rose to 3.9% from 3.7%. While this uptick is a sign that the job market is not invincible, our calculations suggest this increase is not enough to trigger the Sahm Rule recession indicator. Average hourly earnings increased five cents month-to-month and are now 4.3% higher year-over-year (compared to 4.4% in January). The average workweek rose to 34.3 hours in February from 34.2 hours in January. Job gains occurred in healthcare, government, food services and drinking places, social assistance, and transportation and warehousing. Employment showed little change over the month in mining, quarrying, and oil and gas extraction; manufacturing; wholesale trade; information; financial activities; professional and business services; and other services. After this morning's report, S&P 500 stock futures rose slightly from pre-release levels. The yield on the 10-year Treasury was little changed at 4.07%. Before the release, futures contracts suggested a 96% probability that the Fed will keep the funds target at 5.25%-5.50% when it meets on March 19 and 20. After the release, the probability dropped, but only to 95%. The chance that the funds rate will be lower after the May meeting (either by 20 or 50 basis points) rose to 31% from 26%.

We have three strategic asset-allocation models, based on risk-tolerance: Conservative, Moderate and Aggressive. We make tactical adjustments to the models based on our outlooks for the capital markets. February was a solid month for equity investors, as the S&P 500 advanced 5.3%, compared to a 1.8% decline for the fixed-income benchmark ETF AGG. Looking ahead, our Stock-Bond Barometer model slightly favors bonds over stocks for long-term portfolios, in light of the recent rally in equities. Drilling down into stocks, we are over-weight on large-caps. We favor large-caps for growth exposure and financial strength, while small-caps are selling at historical discounts relative to large-caps and offer value. Internationally, U.S. stocks have outperformed global stocks over the trailing one- and five-year periods. We expect this to continue, given the U.S. market's embrace of the innovative Tech sector. In terms of growth versus value, we anticipate that, over the long term, growth, led by the Tech, Consumer, and Healthcare sectors, will top returns from value, led by Energy, Real Estate and Materials, due to secular and demographic trends. As for the fixed-income segment of a portfolio, we break bonds into four areas: Core, such as the industry benchmark ETF AGG or Treasuries; Inflation-Indexed; Opportunistic, such as securitized debt, corporate debt, high-yield or floating bonds; and Cash. We are focused on Core and Opportunistic. On duration, we recommend a shorter term. Last are alternatives. Given the early stage of the current bull market, we think alternatives are less desirable in the growth portion of our models.

Our stock/bond asset-allocation model, which we call the Stock-Bond Barometer, is indicating that bonds are the asset class offering the most value at the current market juncture. But not by much. Our model takes into account current levels and forecasts of short-term and long-term government and corporate fixed-income yields, inflation, stock prices, GDP, and corporate earnings, among other factors. The model output is expressed in terms of standard deviations to the mean, or sigma. The mean reading from the model, going back to 1960, is a modest premium for stocks, of 0.16 sigma, with a standard deviation of 0.98. The current valuation level is a 0.18 sigma premium for stocks, which is down sharply from a 0.85 sigma premium at the end of 3Q23. Other valuation measures also show reasonable multiples for stocks. The current forward P/E ratio for the S&P 500 is approximately 19, which is within the normal range of 13-24 and down from 23 in 2021. The current S&P 500 dividend yield of 1.4%, while below the historical average of 2.9%, is up from an ultralow 1.2%, also in 2021. And that current S&P 500 dividend yield is 33% of the 10-year Treasury yield, compared to the long-run average of 39% and the all-time low of 18% in 1999. Looking ahead, we expect the results from our stock/bond valuation model to favor stocks, as interest rates head lower in 2024 and EPS growth picks up. Based in part on the output from our Stock-Bond Barometer, our current recommended asset allocation model for moderate accounts is 73% growth assets, including 68% equities and 2% alternatives; and 27% fixed income, with a focus on Core and Opportunistic segments of the bond market.

Our analysis of recent data leads us to conclude that the U.S. economy is healthy and consumers are still leading the way. Based on the second update to 4Q GDP from the Bureau of Economic Analysis, personal consumption expenditures (PCE) contributed 2.0 points of the 3.2% increase in GDP, which was revised down from 3.3% in the first estimate. Within PCE, the huge services category was a standout, contributing 1.28 points to GDP. PCE represented 69%, or $15.6 trillion of the fourth quarter's $22.7 trillion GDP. Services represented $10.1 trillion or 45% of total GDP. Our 2024 GDP forecast is for 2.0% growth. We expect 1Q to be up 2.3%. We expect 2Q to be the weakest of 2024, with 1.3% growth ramping to 1.8% in 3Q and 2.3% in 4Q. In February, economists in the Federal Reserve Bank of Philadelphia's Survey of Professional Forecasters expected GDP to rise 2.4% in 2024, with 1Q up 2.1%, 2Q and 3Q each up 1.5%, and 4Q up 1.7%. On March 1, the Atlanta Fed's GDPNow model estimated 1Q24 growth of 2.1%. Our 2024 forecast assumes inflation continues to fall and the Fed has completed its rate-hike campaign, with monetary easing likely to begin in the middle of the year. In recent data, we have seen that January's job market was much stronger than we expected, while post-holiday retail sales were weaker than we anticipated. Walmart said, in its 4Q earnings call, that its customers are resilient but looking for value. WMT is seeing less inflation and hopefully setting a trend of passing the savings on to customers. WMT has reduced the prices of key items. While economic growth may be uneven in 2024 and into 2025, we believe the Fed has the ability to bolster growth if it falters badly. Our early forecast is for GDP to grow 2.0% in 2025. We expect the Fed will be close to meeting its dual mandate, with inflation near 2% and unemployment at approximately 4.1%.

On Friday, the Bureau of Labor Statistics (BLS) likely will provide further evidence that the U.S. job market is healthy. The bigger question is whether the Employment Situation is strong enough to match the 333,000 nonfarm jobs created in December and the 353,000 in January. We believe the job market is strong, but not that strong. In a speech at Princeton University last month, Fed Governor Lisa Cook said that "a range of indicators suggest continued strength in the labor market but also areas worth monitoring for softening demand." The layoffs that make occasional headlines really aren't showing up in the numbers. The four-week average of initial jobless claims is running at 212,500, below the 300,000 that might signal a critical weakening in the job market. The Layoffs and Discharges series in the BLS Job Openings and Labor Turnover Survey (JOLTS) was 1.6 million for December, below the average of 1.925 million since late 2000. "Layoffs and claims for unemployment insurance remain low, implying that all the slowing in labor demand thus far has been along the hiring margin," Dr. Cook said. Job openings and hires, in the JOLTS report, and average weekly hours, in the employment situation report, have declined. Dr. Cook also noted there were signs of "gradual cooling" in the employment cost index for the private sector, which rose 4.1% on a 12-month basis in December, down from 5.1% over the previous 12 months. The January ADP National Employment Report, which tracks private sector hiring, also noted that pressure on wages continues to ease. We expect the employment report on Friday will show that February payroll growth moderated to 185,000, while the unemployment rate remained at 3.7%. We expect growth in average hourly earnings fell by one-tenth to 4.4%, and average hours rose to 34.3 from 34.1, which may have been depressed by January weather.

Equity investors have enjoyed a strong start to 2024, with a nice gain in January supplemented by an even stronger performance in February. Indeed, the S&P 500 closed out the first two months of the year with a gain of 6.8%. Can the positive streak continue in March? Historically, March been a strong month for the markets -- prior to 2020. The average gain for the S&P 500 in the month of March since 1980 is now 1.01%, after absorbing the COVID-induced decline of 12.5% in 2020. March is thus in the middle of the pack (sixth place) in terms of average monthly gains, with a winning percentage of 64%. We note that market returns in March have exceeded 4% on seven occasions since 1980, including a 4.2% gain in 2021 on COVID-19 vaccination progress and a 6.6% advance in 2016 as the market was beginning to recover from the oil plunge of 2014-2015. Last year, March was on the up and up, with a gain of 3.5%. But there have been some clunkers, including 1980 (-10%), 2001 (-6.4%), 1994 (-4.5%), 1997 (-4.3%), 1988 (-3.3%), and 2020. March i generally is a quiet month on Wall Street, as the fourth-quarter earnings reports are finished in February. Without profits to review, investors will be paying very close attention to economic news, including the nonfarm payrolls report next Friday, the consumer price inflation report on March 12, and the Federal Reserve's two-day meeting on the March 19 and 20. The NYSE will be closed for Good Friday observance on March 29. We continue to hold to our forecast for a positive year for the S&P 500, with returns near the historical average.

The Federal Reserve's favorite inflation indicator, the PCE Price Index, will be released by the Bureau of Economic Analysis (BEA) this morning. The PCE differs from the better-known Consumer Price Index (CPI) in that its composition is changed more frequently and is quicker to reflect the impact of real-time pricing fluctuations. In the most-recent report, through December, PCE inflation was reported at 2.6% (the latest CPI report, through January, had inflation at 3.1%). Core PCE, which removes volatile food and energy prices, was 2.9% in the latest month, down from 3.2% in the prior month. Our forecasts call for 2.3% for the headline number and 2.8% for the core reading. Overall, inflation in this cycle peaked in summer 2022 and has been on a downward trek, though the rate of decline is stalling. We track 20 inflation measures on a monthly basis. On average, they currently indicate that prices are rising at a 2.55% rate year-over-year, down slightly from 2.61% a month ago. The numbers are distorted somewhat by a sharp decline in Producer Price Intermediate Goods, which are falling at a 15% rate and likely point to easing prices across the inflation spectrum in the months ahead. Focusing on core inflation -- which we obtain by averaging Core CPI, market-based PCE Ex-Food & Energy, the core GDP PCE Price Index, the five-year forward inflation expectation rate and the 10-year TIPs Break-even Interest Rate -- our reading is 2.67%, down seven basis points month-over-month. That's lower largely because, at long last, sticky prices like shelter and transportation are starting to ease. Investors are expecting that the Federal Reserve's series of rate hikes ultimately will tame inflation, with the five-year forward expectation rate at 2.26%.

The Bureau of Economic Analysis will update its forecast for GDP this morning. Last month, in its initial estimate, the government indicated that 4Q GDP rose at an annualized 3.3% pace. We think that robust rate will hold steady -- though we note that from 1996 through 2022, the average revision from the advance estimate to the second estimate was plus or minus 0.5%. Key drivers behind the 4Q GDP increase included Personal Consumption Expenditures on durable goods, which grew at a 4.6% annualized rate and contributed 36 basis points (bps) to overall GDP expansion. In fact, the major categories of consumer spending were all important to 4Q GDP. Overall PCE contributed 191 basis points, with spending on services and spending on nondurable goods contributing 106 and 49 bps, respectively. Another large contributor to 4Q growth was nonresidential fixed investment, which added 26 bps, including strong contributions from information processing equipment and software. Government spending, which has been up and down in recent years reflecting the impact of the pandemic-related fiscal stimulus programs from Washington, added 56 bps to GDP growth, despite a contribution of just 3 bps from national defense. Much of the government contribution (40 bps) was from spending and investment at the state and local level. Foreign trade, which has also been volatile, was a surprisingly strong contributor in 4Q. Net exports added 43 basis points, with exports adding 68 basis points but offset by 25 basis points from imports. While it recently seemed likely that 2H23 growth would be the strongest for the foreseeable future (with 3Q up 4.9% and 4Q up 3.3%), the U.S. economy has been resilient. The Atlanta Fed's GDPNow report is calling for 1Q24 growth of 3.2% based on the February 27 update.

Value stocks -- a market segment that includes high-yield stocks -- outperformed growth stocks in 2022. That's a recent rarity, as for the past decade-plus, the performance record has favored growth. Since 2010, the Russell 1000 Growth Index has climbed more than 575%, compared to an advance of almost 200% for the Russell 1000 Value Index. In 10 of the past 13 years, growth stocks have topped value stocks. That hasn't always been the case. In the 2000-2010 decade, including the Great Recession, value stocks were better performers than growth stocks, advancing an admittedly low 8%, but still better than growth, which declined 15% during the decade. Value investors trace their roots to the famous "Security Analysis" textbook, written by Ben Graham, an economics professor at Columbia University. Warren Buffett was one of his students. Why the recent deviation in performance? Several reasons, including changes in the make-up of the economy, growth in intangible assets, and the current low level of interest rates. But the tide turned back in 2022. The rollout of COVID-19 vaccines gave a lift to some of the cyclical companies (energy and regional banks) that had lagged in recent quarters. While growth stocks have retaken the lead since 2023, the Federal Reserve continues to keep interest rates high to fend off inflation. This could cap multiple expansion for growth companies in coming quarters. Regardless, the value sector is the place to achieve income. Our High-Yield theme model portfolio is designed to take advantage of these conditions.

After a stressful fall -- when the VIX Volatility Index climbed to 22 in October -- the important "fear index" has calmed and the S&P 500 has popped more than 20%. Is the coast clear? Well, on the positive side, we anticipate that the U.S. economy will avoid a recession into 2025, the Federal Reserve will start to lower interest rates later this year, and earnings growth is poised to accelerate over the next few quarters. There are fundamental risks to be sure, such as geopolitical developments (Russia, Mideast, China), high interest rates (the Fed hasn't cut yet), the chance of recession (the yield curve is still inverted), and the upcoming 2024 U.S. presidential election. All that said, the current VIX index reading is around 14, which is below the 15-year average of 20.5 and signals that investors aren't overly worried about the outlook. These readings compare to the average VIX of 24 during the most-recent bear market and 35 during the financial crisis of 2008-2009. During the long bull market in the 2010s, the VIX averaged 18 and even touched lows below 10 in 2017. We continue to think that the S&P 500 is in the early stages of a new bull market that dates to October 2022. And while the path for equities won't be straight up, we suggest investors over-weight their portfolios toward stocks at the current market and economic junctures.

When it comes to researching earnings for the S&P 500, we think it makes sense to focus primarily on a few key sectors that can actually make a difference. As an example, the Real Estate sector, which accounts for about 2% of S&P 500 capitalization, contributed only 1% of S&P 500 EPS during the recent 4Q EPS period, which is starting to draw to a close. Basic Materials is another 2% market weight that generates a thin 2% of total earnings. We don't think clients should be spending a lot of time trying to get these sectors right. The groups that really make a difference are going to be Information Technology, which has accounted for 24% of the earnings, the largest contribution in a year; and Financial Services and Healthcare, which are expected to account for 17% and 14%, respectively. Perhaps not surprisingly, these are three economic sectors in which the United States enjoys competitive advantages versus other nations. At the next tier, the Industrial, Consumer Discretionary, and Communication Services all appear in line, with market-cap weights and earnings contributions in the 9%-10% range. We note that the Energy sector punches above its weight, accounting for less than 4% of total market capitalization but generating 6% of S&P 500 profits.

Homebuilder confidence rose for a third month in February, according to the National Association of Home Builders. "Buyer traffic is improving as even small declines in interest rates will produce a disproportionate positive response among likely home purchasers," NAHB Chairman Alicia Huey said. The NAHB expects single-family starts to rise about 5% in 2024, but notes the recovery may be "bumpy." Luxury builder Toll Brothers recently provided an upbeat outlook along with better-than-consensus earnings. "Since mid-January, we have seen a marked increase in demand coinciding with the start of the spring selling season," CEO Douglas Yearley said. "With a healthy job market, improving consumer sentiment, and continued low levels of resale inventory, we are optimistic that demand for new homes will remain strong in 2024," he added. Last week, the Commerce Department reported January Housing Starts of 1.33 million at a seasonally adjusted annual rate, down 0.7% from a year earlier. This morning, we expect the National Association of Realtors to report January Existing Home Sales of 4.0 million (SAAR), the same as in January 2023. On February 26, we expect the Commerce Department to report January New Home Sales of 670,000 (SAAR), up 3% year-over-year. Based on the February 16 GDPNow estimate from the Atlanta Fed, first-quarter GDP is expected to rise 2.9%, with a small, but positive, contribution from residential fixed investment. The S&P/Case-Shiller National Home Price Index jumped 5.2% in November. We expect it to rise about 3% for December. The Zillow Home Value Index was up 2.6% in December and 3.1% in January. In this evolving housing market, Argus recommends Lennar, D.R. Horton, and Toll Brothers -- companies with solid financial strength and that are adapting to market conditions.

Alternative investments often are added to diversified portfolios in order to hedge against stock- and bond-market weakness, and reduce the riskiness of overall portfolio returns. At least that's what the textbooks say. Real-time market performance can often be another matter. Of all the alternatives in the marketplace, oil and gold often zig when the broad U.S. equity market zags, and can serve as relatively dependable alternative options. For example, in 2022, the S&P 500 plunged 19% while oil prices rose 4% and gold was steady. Last year was a strong year for stocks, and oil tumbled. Of course, there are years when all move in lockstep, such as 2019, when the three assets increased in the range of 20%-30%. For our asset allocation models in our Investment Portfolio Guide, we typically have alternatives constitute up to 2%-4% of the portfolios. And, given the early stage of the current equity bull market, we recommend an under-weighting in alternatives. While we still think it is early to be adding volatile Bitcoin-related securities to our model portfolios, we are encouraged about the long-term opportunities for blockchain technology. Though performing well this year, Bitcoin lost 65% in 2022. That stings. We will re-consider an exposure to cryptocurrencies once the sector approaches total market capitalization of $5 trillion, or when the regulatory outlook becomes clearer.

Two inflation reports were released last week. Both indicated that pricing pressures are retreating from peaks -- but inflation remains above the Fed's target of 2.0%. Progress to that level may be harder to achieve in the months ahead. According to the latest Consumer Price Index (CPI) report, the overall inflation rate in January of 3.1% was lower than the prior month's 3.4%. That's great -- except Wall Street was looking for 2.9%. The core CPI rate, excluding food and energy, didn't move at all and remains at 3.4%. What's propping up core CPI? Transportation Services (+9.5% YOY) and Shelter (+6.0%). These categories have prices that don't typically fall sharply. The other inflation report last week was the Producer Price Index (PPI). It measures pricing trends farther up the supply chain, at the manufacturing level. Here, we also saw a slowdown in the rate of decline in inflation. The core final demand PPI rate for January was 2.6%, steady month-to-month after having fallen from 4.4% a year ago. We have noted for months that progress will be slow for inflation returning to the 2.0% level. And nothing was terribly alarming in either report. Energy prices remain under control, and prices at the PPI Intermediate demand level (even farther up the value chain) continue to outright decline. We think the June 2022 CPI rate was the peak reading for the index this cycle, as the housing market cools, supplies of new vehicles are replenished, and the price of oil stays below $90 per barrel. The Fed lifted the feds fund rate from 0.0% to above 5.25% over the past 18 months, and the hikes appear to be reducing inflationary pressures. We still look for the U.S. central bank to be lowering rates in 2H24 as their concern shifts more toward economic growth.

Rapidly rising inflation in 2022 knocked stocks into a bear market. While growth strategies suffered the most, value strategies also declined. Even bond prices were lower that year. Stocks have recovered and a new bull market has begun, but gains largely have been driven by only a handful of high-tech companies. Inflation remains an issue and no one really knows when the Federal Reserve will lower interest rates. Is a recession in the offing? With all the uncertainty, is it time for investors to cash in their chips? We note that investors exit the stock market at their own peril, as long-term returns from equities consistently have outpaced long-term returns from other asset classes such as fixed income and cash. As well, those fixed-income returns are from eras when the 10-year Treasury bond yield was much higher than the current level around 4.0%. So what's a potential equity strategy for investors amid all the uncertainty? Argus believes that Min Vol is an all-weather strategy that is timely in any investing climate. Academic literature and, more to the point, returns history indicate that Min Vol can deliver market-matching returns on an absolute basis and superior returns on a risk-adjusted basis over various time periods. Argus has developed a sophisticated approach to Min Vol investing built around our proprietary quality and safety screens. We recently updated our Min-Vol Theme Model Portfolio.

The current price of a barrel of the crude oil benchmark grade West Texas Intermediate has remained in the $70-$80 range, as we expected. That's down from a high near $94 in late September but up from the lows of $66 in March 2023. We look for prices to stabilize at these levels for the next few months (through the winter heating season and amid geopolitical uncertainties). In addition, global economic growth remains under pressure due to high interest rates. The price of West Texas Intermediate crude oil in 2023 averaged $78 per barrel, compared to 2022's average price of $95. Indeed, 2022 was a volatile year for the energy industry, as the price per barrel of oil ranged from $71-$121. We don't look for that much volatility in 2024, and our forecast calls for WTI to average $80 a barrel and trade in a range of $95-$65 for the year. The core drivers behind oil prices in the long term are global demand and global supply. According to the U.S. Energy Information Administration, there was excess supply in 2023: global consumption was 101.1 million barrels per day, while global production was 101.7 million barrels. Forecasts for the next two years call for supply and demand to be mostly aligned. That's likely to keep a lid on oil price spikes. Of course, there are always wildcards, such as geopolitical developments (ranging from wars to sanctions to turmoil in the Middle East. These wildcards can cause prices to fluctuate dramatically. That said, absent the wildcards, the global demand-supply outlook suggests the days of triple-digit oil prices are in the rear-view mirror.

The grip of monetary policy on the U.S. economy appears to be loosening, even though the Federal Open Market Committee is unlikely to cut the fed funds rate next month. The full effect of monetary tightening may have peaked in July according to our analysis of the Proxy Funds Rate, an analytical tool tracked and updated monthly by the Federal Reserve Bank of San Francisco. At the end of January, the rate was 5.8%, compared with the official fed funds target of 5.25%-5.5%. The proxy rate peaked at 7.1% in July. The rate recognizes that central bankers use multiple tools (not just short-term interest rates) to meet their "dual mandate" of stable prices and maximum sustainable employment. The Fed uses forward guidance to communicate the direction of monetary policy and influence longer-term interest rates and broader financial conditions. The Fed also can expand its balance sheet through the large-scale purchase of Treasury and Mortgage Backed Securities, which is known as quantitative easing, or reduce its holdings, which is known as quantitative tightening. The Proxy Funds Rate uses the analysis of 12 financial variables, including Treasury rates, mortgage rates, and borrowing spreads, to translate the full range of policy actions into an analogous level of the funds rate, That can help assess whether policy is tighter or easier than the official funds rate suggests. In a November 2022 San Francisco Fed Economic Letter, the developers of the proxy rate noted the following: "As the FOMC increasingly used forward guidance and the balance sheet, the proxy rate has tended to lead the actual funds rate, reflecting the fact that financial markets are forward looking." The letter also noted that "combined policy tools have a more complex effect on the economy than the federal funds rate indicates." This suggests to us that Fed watchers should become even more diligent.

The transportation and supply-chain industry moves goods from producers to consumers. In the early days of COVID-19, consumer demand plummeted. But as the world shifted to remote working, freight demand surged. Consumers bought office and exercise equipment, making many of their purchases online and driving freight levels. After the pandemic began to recede, many workers stayed home, but shifted spending patterns towards experiences, leading to a downturn in shipping demand. While the supply chain has started to normalize, it remains out of balance, with periods of rising shipping demand likely to make sourcing goods and inventories at a timely rate challenging. The transportation and supply-chain industry accounts for almost 2% of the S&P 1500 market capitalization and just over 2% of the revenue generated by companies in the index. The largest 20 companies by market capitalization collectively generated revenues of almost $400 billion in 2022. These companies employ over 8 million workers, with over 26% of them working in truck transportation. According to the U.S. Department of Transportation's Bureau of Transportation Statistics, the U.S. transportation system moved an average daily 55.2 million tons of freight valued at more than $54 billion. Excluding materials moved by pipeline, estimated annual freight moved will be approximately 16.4 billion tons. The majority is moved by truck, which handles about 75% of the total fright load. Water and rail freight each move about 6%, air freight moves less than 1%, and the remaining amount is moved by multiple modes.

The benchmark U.S. 10-year Treasury bond yield is near 4.1%. The yield tipped over the key 5% threshold in mid-October, its highest rate in nearly 16 years, before retreating to current levels. The current yield is down almost 20% from the October peak. The retreat is now the interesting part. The Federal Reserve has all but said that it is done raising interest rates for this tightening cycle. Economists and Wall Street are eagerly waiting hints that the Fed's "pivot" might translate into the fed funds rate actually starting to inch down. But Chairman Powell is maintaining a cautious tone. Argus' Fed watcher, Kevin Heal, has remained equally steady with his projection that the first rate cut is not likely until the second half of this year. The U.K. is seeing a similar trend, with its 10-year benchmark bond yield at 3.9%. Sentiment there is also growing that higher rates might be elevated for longer than expected, as the U.K. has experienced rampant inflation over the past few years. Elsewhere, political uncertainty in South Africa and Brazil are keeping those sovereign debt interest rates near 10%. Russian debt is above 12%, up 300 basis points from a year ago, as the conflict with Ukraine drags on. At the other extreme among the biggest nations, yields for Japanese debt remain low at 0.7%. From a portfolio perspective, we would avoid over-weighting foreign-government fixed-income securities at this time, given their volatile yields, sovereign risks, and repatriation issues.

Each month we take a close look at an aspect of sector investing. This month, we are examining growth and valuation. Investors hunting for stocks that reasonably balance long-term growth prospects and current value characteristics might want to look at companies in the Financial Services, Communication Services, and Healthcare sectors. These are among the industry groups that are currently selling for PEGY ratios -- (price/earnings)/(growth+yield) -- that are at or below the S&P 500's ratio of 2.4. To generate the PEGY ratios, we use the P/E ratio for each sector based on forward earnings for the numerator. For the denominator, we average the growth rates for the past five years, along with two years of forward estimates -- this in order to achieve a less-volatile earnings growth-rate trend. We then we add the current yield to approximate total return. As an example, the current S&P 500 P/E ratio is 20, the current yield is 1.6%, and the forecast five-year growth rate is 7.1%. The formula is 20/(1.6+7.1) = 2.4. Premium-valued sectors with low growth rates include Consumer Staples and Basic Materials. Based on our analysis of growth rates and valuations, along with other factors, we have established our current over-weight sectors as Technology, Financial Services, Consumer Discretionary, and Communication Services. Our under-weight sectors are Energy and Consumer Staples. Our Market-Weight sectors are Healthcare, Consumer Staples, Utilities, Real Estate, and Basic Materials.

We have three strategic asset allocation models, based on risk-tolerance levels: Conservative, Moderate, and Aggressive. We make regular tactical adjustments to the models, based on our outlooks for the capital markets. January was a solid month for equity investors, as the S&P 500 advanced 1.6%, compared to a 0.1% increase for the fixed-income benchmark ETF AGG. From an asset-allocation standpoint, our Stock-Bond Barometer model slightly favors stocks over bonds for long-term portfolios, in light of the recent sharp decline in bond yields. Drilling down into equities, we are over-weight on large-caps. We favor large-caps for growth exposure and financial strength, while small-caps are selling at historical discounts relative to large-caps and offer value. Moving to the international arena, U.S. stocks have outperformed global stocks over the trailing one- and five-year periods. In terms of growth versus value, we anticipate that over the long term, growth, led by the Tech, Consumer, and Healthcare sectors, will top returns from value, led by Energy, Real Estate, and Materials, due to favorable secular and demographic trends. As for the fixed-income segment of a portfolio, we break bonds into four areas: Core, such as the industry benchmark ETF AGG or Treasuries; Inflation-Indexed; Opportunistic, such as securitized debt, corporate debt, high-yield or floating bonds; and Cash. Of these, we are focused on Core and Opportunistic. On duration, we recommend a shorter term. Last are Alternatives. Given the early stage of the current bull market, we think Alternatives are less desirable in the growth portion of our asset-allocation models. Our recommended weighting is 0%-2%.

Aerospace and defense design and manufacturing is one of the core competencies of the U.S. economy, along with innovative technology, allocating capital, and research and development. The recovering global airline industry bodes well for commercial aerospace demand over the next several years. The number of airline passenger and airline revenues have started to recover. Argus Research believes that the industry will be able to recover a substantial amount of its pre-COVID-19 revenues and profitability into 2024. That should drive increased commercial aerospace demand, as airlines resume investing in products after cutting all but the most crucial expenditures during the pandemic. Argus Research also expects solid military spending over the next few years, as President Biden has long favored a strong military. According to the Office of the Undersecretary of Defense, military funding for FY2023 tallied $852 billion for national defense ($816 billion base plus $35.8 billion supplemental). For FY2024, the White House is requesting a base defense budget of $842 billion, which would represent 3% growth over the base budget for FY2023. On top of the country's typical strong level of defense spending, the budget has been influenced by the ongoing Russian invasion of Ukraine, rising inflation, and other factors. We see the current geopolitical environment keeping this type of spending high for some time to come.

Our stock/bond asset-allocation model, which we call the Stock Bond Barometer, is now indicating that stocks are the asset class offering the most value at the current market juncture. But not by much. The model takes into account current levels and forecasts of short-term and long-term government and corporate fixed-income yields, inflation, stock prices, GDP, and corporate earnings, among other factors. The output is expressed in terms of standard deviations to the mean, or sigma. The mean reading, going back to 1960, is a modest premium for stocks, of 0.16 sigma, with a standard deviation of 0.98. The current valuation level is a 0.04 sigma discount for stocks, which is now below fair value and down sharply from a 0.85 sigma premium at the end of 3Q. Other valuation measures also show reasonable multiples for stocks. The current forward P/E ratio for the S&P 500 is approximately 18, which is within the normal range of 10-21 and down from 23 at the end of 2021. The current S&P 500 dividend yield of 1.4%, while below the historical average of 2.9%, is up from an ultralow 1.2% also in 2021. And that current S&P 500 dividend yield is 35% of the 10-year Treasury yield, compared to the long-run average of 39% and the all-time low of 18% during 1999. We expect the results from our stock-bond valuation model to continue to improve, as interest rates head lower in 2024 and EPS growth picks up. Based in part on the output from our Stock Bond Barometer, our recommended asset allocation model for moderate accounts is 70% growth assets, including 68% equities and 2% alternatives; and 30% fixed income, with a focus on core and opportunistic segments of the bond market. On duration, we recommend focusing on the short end of the curve.

We have studied the monthly, quarterly, and annual returns in the stock market since 1980 -- and February is not one of the best months. On average, stocks rise less than 0.1% in the shortest month of the year. Only the months of August and September have generated weaker average returns. Yes, there have been some strong Februarys, including 7% gains in 1986, 1991, and 1998, as well as a 5.5% surge in 2015. But there have been some clunkers as well, including a 6% drop in 1982; a 9% plunge in 2001 during the "dot-com" bust; an 11% collapse near the bottom of the Great Recession and bear market in 2009; and, of course, the 20% bomb in February 2020, as the coronavirus began to spread around the world and the economy tumbled into a recession. Last year was nothing to write home about, with a 1.9% drop during the month. This time around, February is starting with a bit of positive momentum, as returns have been in the black for each of the past three months. Earnings season continues and, as usual, companies are outperforming Street expectations. However, equity investors got a surprise message from the Federal Reserve last week that interest rates probably won't be coming down as fast as the Street had expected. While we continue to think the general fundamentals for stocks are positive (profits are rising, valuations are reasonable, the economy is growing, and rates are headed lower), we still suggest that equity investors focus on well-managed companies with clear growth prospects and clean balance sheets -- especially in February.

The Bureau of Labor Statistics (BLS) reported that the U.S. economy generated 353,000 new jobs in January, well above our forecast of 155,000 and the consensus of 180,000. December's result was revised higher to 333,000 from 216,000, and job gains in November and December were revised higher by a total of 126,000. January's increase in payrolls and the December revision took the three-month average to 289,000, which is above the 12-month average of 255,000 during 2023. The unemployment rate was unchanged at 3.7%. These strong statistics support the Fed's decision to not reduce interest rates this week and also align with why Chair Jerome Powell downplayed the possibility of a rate reduction in March. This morning's report provides additional evidence that the U.S. economy is on solid ground and further reduces the likelihood of a recession in 2024. Average hourly earnings increased 19 cents month-to-month and are now 4.5% higher year-over-year (compared to 4.3% in December). The average workweek declined to 34.1 hours in January from 34.3 hours in December. Job gains occurred in professional and business services, healthcare, retail trade, and social assistance. Employment declined in the mining, quarrying, and oil and gas extraction industry. After this morning's report, stock futures declined slightly from pre-release levels and the yield on the 10-year Treasury jumped to 4.00% from 3.89%. Before the release, futures contracts suggested a 37% probability that the Fed will cut rates when it meets on March 19 and 20. After the release, the probability dropped to 17.5%. The chance of a Fed rate cut in May (either by 20 or 50 basis points) plunged from 92% to 70%.

The Fed wrapped up its Open Market Committee meeting on Wednesday and held the federal funds rate steady at 5.25%-5.50%. This was the fourth pause following a hike in July, which was the eleventh increase by the central bank over 16 months. The fed funds rate remains at its highest level since 2000 and is above the long-term average of 4.4%. The hikes have been reducing inflation. The latest core CPI reading was 3.9%, down from 9.1% in July 2022, and the latest core PCE Price Index reading was 2.9%. Despite the downtrends, both are well above the Fed's target of 2.0%. And that's the problem. While the central bank disclosed at its previous meeting that it may lower interest rates three times in 2024, Wall Street jumped the gun a bit and was expecting five or six. When Fed Chairman Powell commented on Wednesday that the March meeting is probably not the appropriate time for a rate cut, stocks started to tumble. By the end of the session, the DJIA had given back 250 points and the Nasdaq had dropped 2.0%. At Argus, our forecast has been that the Fed will start to cut rates in July, and will likely keep to its word of fewer cuts, rather than more cuts. That forecast stands. We believe the most important sentence from the Fed's statement was the following. "The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent." The Fed is indeed ahead of the inflation curve, and the current real fed funds rate of 2.4% is above the historical average of 1.6%. At the recent pace of decline, core PCE could be closer to 2.5% by mid-year, at which point the Fed might feel a move is more appropriate.

Our analysis of recent data leads us to conclude that U.S. consumers have more horsepower than we thought. Two notable data points include personal consumption expenditures (which in the 4Q GDP report were 100 basis points stronger than we expected) and holiday sales tallied by the National Retail Federation (which were 80 basis points above our estimate at 3.8%). We are raising our forecast for 2024 GDP growth to 2.0% from 1.7% and are raising our 1Q forecast to 2.3% from 0.7%. We expect 2Q to be the weakest of 2024, with 1.3% growth ramping to 2.3% growth in 4Q. This assumes inflation continues to fall and the Fed has completed its rate-hike campaign, with monetary easing likely to begin in the middle of the year. Growth is not consistent across all segments of the economy. Industrial production edged up in December after notable declines in September, October, and November. The ISM Purchasing Managers Index is a widely followed indicator of future growth. It has been below the critical level of 50 since September 2022. Meanwhile, the Conference Board's Leading Economic Index in December continued to signal recession risk. While economic growth may be uneven in 2024 and into 2025, we believe the Fed has the ability to prop up the economy if growth falters badly. While 2025 will be the first year of a new presidential term -- and the conviviality of the executive and legislative branches is difficult to assess -- we are maintaining our early forecast for GDP to grow 2.0%. We expect the Fed will be close to meeting its dual mandate, with inflation near its 2% goal and unemployment at approximately 4.1%. We expect the funds rate to decline towards what we believe to be a long-term neutral range of 2.5%-3.0%. The Federal Reserve board members and bank presidents are anticipating GDP growth of 1.4% in 2024 and 1.8% in 2025, based on median estimates provided in December.

The S&P 500 is up approximately 37% from its bear-market low of 3577 on October 12, 2022. The index surpassed a 20% gain back in June 2023 and, according to one long-held theory, is now in a bull market. Even on the more-stringent definition of a bull market -- that stocks must reach a new all-time high before a bull market begins -- a new bull has started, as the S&P 500 has now topped the old 1/3/2022 high of 4796. Certainly, there were some wobbly steps back in August, September, and October, when the index sold off 2.1%, 5.0%, and 4.0%, respectively, due to high inflation and high interest rates. But the market seems to have settled as the economy continues to grow and inflation declines. What can investors expect going forward from a bull market? We have studied the 13 bull markets that have occurred since the end of World War II. On average, the S&P 500 gained 164% during these 13 periods, which averaged 57 months in duration. We also note that recent bull markets have generated higher returns over longer periods of time. On average, the five bull markets since 1980 have seen stocks advance about 240% over a period of 70 months. And the bull market prior to the pandemic carried on for 11 years, during which stocks rose 500%. It is worth pointing out, though, that the 2009-2020 bull market began with stocks deeply depressed on valuation, whereas stocks are already a bit above fair value in the current market environment. Even so, if rates continue to head lower on mild inflation news, earnings growth accelerates further, and the economy avoids a recession, then this new bull market, led by the performance of disruptive technology companies, could have room to run.

On Friday, the Bureau of Labor Statistics (BLS) likely will provide further evidence that the U.S. job market is healthy, but cooling. Last week, we saw evidence that the economy is very healthy and inflation is cooling. Thursday's Gross Domestic Product report from the Bureau of Economic Analysis showed that low unemployment and rising wages are sustaining the consumer sector as a resilient driver of GDP, even in the wake of the Federal Reserve's 11 rate hikes to tame inflation. Fourth-quarter GDP rose by a better-than-consensus 3.3%. Last Friday, the BEA reported that Personal Spending increased 5.9% on a year-over-year basis in December, fueled by a 4.7% increase in Personal Income. Evidence that inflation is slowing (though slightly less emphatic) came from the GDP Price Index, rising just 1.5% at a seasonally adjusted annual rate in 4Q. The Fed-favorite PCE Core deflator for December decelerated to 2.9% year-over-year growth from a 3.2% pace in November. Despite the strong GDP, futures contracts on fed funds moved very little, suggesting traders still expect the Federal Open Market Committee to maintain the funds target of 5.25%-5.5% when it meets this week. Futures imply a 50% chance for a quarter-point reduction in March. We expect the employment report on Friday will show that January payroll growth eased to 155,000 from a surprisingly strong 216,000 in December, and the unemployment rate remained at 3.7%. We expect growth in average hourly earnings to fall by one-tenth to 4.0%, and average hours worked to remain at 34.3. Jerome Powell is likely to share the FOMC's insights on the job market during his press conference following the meeting on Wednesday. Fed Governor Christopher Waller shared his views in a speech at the Brookings Institution on January 16, as follows: "I see the surprises in the December jobs report as largely noise against a trend of ongoing moderation that supports progress toward 2% inflation."

The Fed's favorite inflation indicator, the PCE Price Index, will be released this morning. The index differs from the better-known Consumer Price Index in that its composition is changed more frequently and is thus quicker to reflect real-time pricing fluctuations. In the most-recent report, through November, PCE inflation was reported at 2.6% (the latest CPI report, through December, had inflation at 3.4%). Core PCE, which removes volatile food and energy prices, was 3.2% in the latest month, down from 3.4% in the prior month. Our forecasts call for 2.7% for the headline number and 3.0% for the core. Overall, inflation in this cycle peaked in summer 2022 and has been on a downward trek, though the rate of decline is stalling. We track 20 inflation measures on a monthly basis. On average, they are indicating that prices are rising at a 2.5% rate year-over-year, down from 2.6% a month ago. We note the numbers are distorted somewhat by a sharp decline in Producer Price Intermediate Goods, which are falling at a 19% rate and likely point to easing prices across the inflation spectrum in the months ahead. Focusing on core inflation -- which we obtain by averaging Core CPI, market-based PCE Ex-Food & Energy, the core GDP PCE Price Index, the five-year forward inflation expectation rate and the 10-year TIPs Break-even Interest Rate -- our reading is 2.74%, down 10 basis points month-over-month. That's lower largely because sticky prices like shelter and transportation are finally starting to ease (the Sticky Price Core CPI Index reading is 4.6%, down from 5.6% six months ago). Looking ahead, investors are expecting that the Fed's series of rate hikes ultimately will tame inflation, with the five-year forward expectation rate at 2.32%.

According to the advance estimate released today by the Bureau of Economic Analysis, U.S. Gross Domestic Product expanded in the fourth quarter at an annualized rate of 3.3%. That's well above the 1.7% consensus, but below the 4.9% growth we saw in the third quarter. Areas of strength in 4Q included Exports of Services, which rose at a 9.5% rate; Personal Consumption Expenditures on Durable Goods, which rose at a 4.6% rate; Investment in Structures, which advanced at a rate of 3.2%; Exports of Goods, which climbed at a 4.7% rate; and Government Spending, which rose 3.3%. Segments of the economy that struggled or worked against GDP growth included Imports (which were up 1.9%). The GDP report also contains data on inflation, which was encouragingly mild amid the economy's strong growth. The PCE Price Index increased 1.7% in the fourth quarter, compared with an increase of 2.6% in the third quarter. Excluding food and energy prices, the PCE Price Index increased 2.0%, compared with an increase of 2.0% in the previous quarter. In our view, the report this morning indicates that the consumer sector remains a resilient driver of overall GDP, even in the wake of the Federal Reserve's 11 rate hikes to tame inflation. After the report, futures on the S&P 500 rose and the yield on the 10-year Treasury note declined slightly. The report showed that the economy is in no danger of slipping into recession and provided encouraging evidence that the Fed is successfully reducing inflation to its target levels. Based on futures trading, there was little change in the expectation that the Fed will maintain its 5.25%-5.5% policy target at its meeting later this month. Futures continued to show that the chance of a rate cut in March is slightly better than 50%.

Since 2021, the biotechnology industry has underperformed the broader market, reversing a multi-year trend that had seen superior returns since coming out of the Great Recession. In 2021 and 2022, the equal-weight SPDR Biotech ETF (XBI), which includes more small-cap, development-stage companies, declined 21% and 26%, respectively, compared with a 27% gain and 18% decline for the S&P 500, including dividends. The trend continued in 2023, with XBI gaining 8% compared with a 24% advance for the S&P 500. We attribute the underperformance, particularly for development-stage companies, to factors including a "risk-off" environment amid elevated inflation and increasing interest rates, which contributed to challenging financing markets and a near closing of the IPO window. As well, an elevated number of biotech companies traded below their cash reserves and explored strategic alternatives or bankruptcy. We note increased scrutiny over runaway drug pricing weighing on the industry. But the tide may be turning. Biotech has been on fire since bottoming a few months ago, with the iShares Nasdaq Biotech (IBB) surging 20%-plus and printing a minor breakout of its range back to January 2022. Looking ahead, mergers and acquisitions (M&A) and the ability to raise capital are major keys to growth in the industry. We are encouraged by the return of some larger scale M&A deals and a seemingly healthy appetite for deals from larger biotech and big pharma players, as a new wave of patent expirations for many high-revenue-generating medicines is expected in the second half of the decade.

Demand from all corners of the globe for the safety and security of U.S. Treasury debt has acted to keep a lid on long-term interest rates, even as the Federal Reserve aggressively raised short-term rates over the past two years. Total public debt owed by the U.S. federal government was $33.2 trillion at the end of 3Q23, according to the Department of the Treasury (DoT). Outside of U.S. investors, the two largest holders of U.S. public debt are the nations of Japan, which owns 3.3% of the debt, and China, which owns 2.6%. The other nations among the top 10 holders have 8% of the debt, so the top 10 holders collectively own about 14%. The grand total of U.S. debt owned by foreign holders is $7.4 trillion, or about 22% of the total. While the absolute holdings level is roughly flat over the past six months, we have seen some pronounced shifts among major holders. Japan's bondholders historically have been long-term in nature, attracted to Treasuries while their local sovereign bond yields have been near zero for years. A recent rate hike in Japan, though, has led to the repatriation of approximately $200 billion out of Treasuries and into local sovereign securities in the past year. China has also been selling, in part for political reasons. China's current Treasury holdings are lower by about $175 billion over the past year. But while some nations have reduced their exposure, others have increased it. Belgium, for example, has increased its holdings by 36% in the past year, while and the U.K.'s holdings are up 10%. We think this type of global demand for U.S. Treasuries should help keep a lid on long-term rates in 2024.

The yield curve has been inverted for months. But in recent weeks, that inversion isn't so steep. Back in April, two-year Treasury note yields were about 100 basis points (bps) above 10-year yields. Now the gap is 28 bps. There are several reasons for this change, and they point toward a shift to a normal upward-sloping curve in the next few quarters. First, U.S. economic trends have been positive. Fixed-income investors have moved away from fears of deflation and are again seeking a premium in yields versus inflation. That has lifted longer-term interest rates. Second, the Fed finally is in front of the inflation curve. The central bank is now building a cushion between fed funds and core PCE in order to push inflation back toward 2.0%. That is all well and good -- but if the Fed's gap is too wide, the central bank risks tipping the economy into a recession. Fed Chairman Powell has explained to financial markets that he and his colleagues want to keep short-term rates high for a period of time, which is where the markets are now. But the day will come when the central bank feels it has brought inflationary pressures under control and will start to lower rates in order to keep the economy growing. We think the first rate hike will be at mid-year. The two-year Treasury note already has anticipated that cut, and its current yield is lower by 50 basis points since November. We look for the yield curve to be largely flat by the summer and then, as the Fed plans to cut further, we think the curve will resume its normal upward slope in 4Q24.

Generally, the dollar was stable in 2023, as we expected, with the Real Trade-Weighted U.S. Dollar Index finishing the year about where it started. But it wasn't exactly a quiet year for the greenback, which declined about 5% in the first half as investors anticipated the Fed would move to the sideline by mid-year. When it became evident that the U.S. central bank was still in rate-hike mode in the second half, the dollar reclaimed lost ground and established highs for the year. Then, at year-end (and once the Fed signaled it is likely to cut rates in 2024), the greenback eased back toward current levels. We note that those levels are still 16% higher than the historical average since 2000. Looking ahead, we anticipate a modest downward trend for the greenback in 2024. Indeed, the dollar typically tracks GDP growth trends and we think U.S. economic expansion is poised to slow in coming quarters due to the Fed's rate hikes. In addition, we expect higher rates to increase the interest payments as a percent of GDP from recent lows of 1.5%, putting a modest strain on the U.S. balance sheet; the current rate is 1.8%. Lastly, the still-elevated valuation of the greenback implies that other currencies -- and even gold or other commodities -- are possibly undervalued, and we would expect investors (such as the petrodollar-fueled sovereign wealth funds) to bid up those values at a measured pace over time. For investors, a lower dollar is a positive factor for export companies, as their goods become cheaper in the global marketplace.

The housing market was "frozen" in 2023, as sellers didn't list homes because they had very low mortgage rates, this according to Zillow's co-founder Spencer Rascoff. But in a Wall Street Journal interview, he added that the market is "starting to thaw." One reason is that life, work, and family situations have changed for many homeowners and their residence no longer meets their needs. Prospective sellers also are adjusting to the "sticker shock" of higher mortgage rates, Rascoff added. Last month Chief Economist Laurence Yun of the National Association of Realtors' said: "A marked turn can be expected as mortgage rates have plunged in recent weeks." On January 8, Fannie Mae reported an improvement in their Home Purchase Sentiment Index due primarily to a "significant jump" in the share of consumers expecting mortgage rates to decline in the next year. Still, improvement in home sales may be tempered by affordability issues from high home prices, according to Fannie Mae economist Mark Palim. We expect the Commerce Department to report December Housing Starts of 1.45 million at a seasonally adjusted annual rate. We expect the National Association of Realtors to report December Existing Home Sales of 3.85 million (SAAR). We expect the Commerce Department to report December New Home Sales of 680,000 (SAAR). The Bureau of Economic Analysis will provide its advance estimate of 4Q Gross Domestic product. We expect 2% growth. Housing is not expected to be a significant contributor to GDP growth based on the January 10 GDPNow estimate from the Atlanta Fed. The S&P/Case-Shiller National Home Price Index jumped 4.9% in October. We expect a gain of about 2.5% for November. The Zillow Home Value Index was up 2.2% in November. In this evolving housing market, Argus recommends Lennar, D.R. Horton, and Toll Brothers -- companies with solid financial strength and that are adapting to market conditions.

China is the second largest economy in the world in terms of total GDP. But on a GDP per-capita and purchasing power parity basis, this mighty nation remains a fraction of the size of the U.S, let alone Singapore or Norway, and trails dozens of other countries. In 2023, the GDP/Capita rate was $21,500 in China versus $76,400 in the U.S. We expect an above-average growth rate (5%-6%) to resume in China for at least the next decade as the impact of the pandemic fades. But growth will be different from the experience pre-pandemic. We look for less investment by China into domestic infrastructure. Instead, we think the Chinese government will focus on raising the living standards of its 1.4 billion people, investing to lift citizens out of rural poverty, lengthen their lives, and clean the air, among other initiatives. This growth will favor the business and financial services industries, as well as healthcare. These industries will be targeting a wealthier consumer base than was the case even five years ago and their products can meet with demand. India, the world's most-populous country, is a better candidate for higher growth and infrastructure spending over the next decades. Its GDP/Capita rate was $8,400 last year. India's government has set a goal of catching up to China and becoming a developed nation by 2047. That kind of advancement may require annual growth of 8%-9% per year, which is achievable if India can convince global companies to move production to its shores and away from China. India also will need to focus on increasing the wealth of its citizens, so they can become customers for the companies that move in.

As global markets struggle in the new environment of higher interest rates, renewed conflict in the Middle East, and the lingering battle between Russia and Ukraine, one thing has not changed. U.S. stocks are more expensive than global stocks. And with the large run-up in stock prices in late 2023, U.S. stocks are even more expensive. Consider P/E ratios. The trailing P/E ratio on the S&P 500 is 26, above the global average of 12 and well above the 6-11 average P/Es for emerging markets stocks. A review of yields tells a similar story. The current dividend yield for the S&P 500 is 1.4%, versus the global average of 2.6% and Asian, Australian, and Latin American yields of 4%-8%. The foreign region that does not completely fit the pattern is the Middle East. The average P/E on a Saudi Arabian stock is a high 15.0 and the yield is a low 2.2%. This can be blamed on oil prices. Taking a step back, one reason investors generally are willing to pay a higher price for North American securities is the transparency of the U.S. financial system as well as the liquidity of U.S. markets. What's more, global returns can be volatile across individual countries, given currency, security, political, and geopolitical risks. Indeed, U.S. stocks (ETF SPY) have outperformed EAFE (ETF EFA) over the past year as well as over the past five years. Even so, we recommend that growth investors have approximately 5%-10% of their equity allocations in international stocks to take advantage of the value, and we have been adding global stocks to our Universe of Coverage.

The top-level Consumer Price Inflation rate in the U.S. ticked slightly higher month-over-month in December, but remains far below peak levels from 2002. The core rate, excluding food and energy, declined slightly. The results generally were above consensus and slightly above our forecasts. The Bureau of Labor Statistics reported a 3.4% increase in overall inflation year-over-year through December, compared to a 3.1% rate through October and a 9.1% rate back in June 2022. The core rate declined 10 basis points versus the prior month, to 3.9%. Month-over-month, the all-items CPI ticked higher by 20 basis points, and core CPI was steady. Segments of the economy with stable/easing prices year-over-year included Energy, Used Cars & Trucks and Medical Care Services. New Vehicles and Apparel prices both increased at an annual rate of 1.0%. Inflation continue to be propped up by Transportation Services and Shelter. Tobacco product prices up 7.8% year-over-year. We continue to think the June 2022 CPI rate was the peak for the index this cycle, as the housing market cools off, supplies of new vehicles are replenished, and the price of oil stays below $90 per barrel. The Federal Reserve has lifted the fed fund rate from 0.0% to above 5.25% over the past 18 months, and the rate hikes appear to be reducing inflationary pressures. But will the rapid rate of increases tip the economy into a recession as inflation continues to head toward 2.0%? We look for the U.S. central bank to be lowering rates in 2H24 as their concern shifts more toward economic growth.

Growth sectors soared on spiking AI interest in the May-through-July period, stumbled in the August-through-October period, and roared again in November-December. No sector was spared in the August-October selling, and the recovery in November-December was equally broad. Because many sectors did not have the performance "cushion" that growth sectors carried into the market correction, all but three sectors were down year-to-date as of the end of October. That improved meaningfully to seven positive sectors as of the end of November. And for the full year, nine of 11 sectors landed in the win column. In broad terms, the year 2023 for stocks was positive, but it was also narrow. Three sectors -- Communication Services, Technology, and Consumer Discretionary -- accounted for most of 2023 market advance. None of the other eight sectors beat the overall market for 2023. The Street is divided as to whether the AI-driven "Magnificent Seven" can remain magnificent in 2024. Bears point out that valuations such as absolute and relative P/Es for these stocks are stretched. Bulls respond that margins and growth rates for these stocks are also two-times or more the market average. Given that the age of generative AI has only just started, Argus believes these names and other perceived AI winners could lead the market over the next several years. In 2022, investors became accustomed to buying cyclical, defensive, interest-rate-sensitive, and inflation-beneficiary stocks. Although Argus had expected to see a more broad-based advance from a sector perspective in 2023, we have not given up hope for additional sector breadth in 2024.

The 4Q23 EPS season gets under way later this week, launched, as usual by the earnings reports from the big banks. In the following week, the floodgates will open with Consumer, Healthcare, and Industrial companies all releasing results. Tech and Energy companies generally report later in the EPS period, and then the Retailers wrap things up, likely in mid-to-late February. Consensus estimates for 4Q23 growth range from low-single-digits to mid-single-digits. This follows 7.5% growth in 3Q EPS, according to Refinitiv. Energy could once again be a wild card this quarter. Although Energy represents only about 5% of S&P market capitalization, 3Q23 S&P 500 earnings less Energy rose at a 13% clip year-over-year. For 2023, our full-year earnings estimate is $226, implying low-single-digit growth from 2022 levels. Following low-single-digit EPS declines for 1Q23 and 2Q23 EPS, along with the rebound in 3Q, we look for another quarter of EPS growth in 4Q and at a high-single-digit rate against a weak year-earlier comparison. Remember, last quarter, just over four-fifths of companies exceeded consensus expectations; and the average beat against expectations was above 7%. Over the preceding decade, about 75% of S&P 500 companies exceeded expectations; and those companies, on average, topped consensus quarterly EPS estimates by about 6%.

December was another good month for investors, as stocks rose 4% and bonds increased 3%. In 2023, stocks maintained the performance lead over bonds, with a 24% gain in the benchmark S&P 500 compared to a 2.5% increase for the fixed-income benchmark ETF AGG. Looking ahead, our Stock-Bond Barometer model now modestly favors stocks over bonds for long-term portfolios. In other words, these asset classes should be near their target weights in diversified portfolios, with a slight tilt toward stocks, given the recent decline in yields. We are over-weight on large-caps. We favor large-caps for growth exposure and financial strength, while small-caps offer value. Our recommended exposure to small- and mid-caps is 12%-13% of equity allocation, below the benchmark weighting of 20%. U.S. stocks have outperformed global stocks over the trailing one- and five-year periods. We expect this long-term trend favoring U.S. stocks to continue, given volatile and erratic global economic, political, geopolitical, and currency conditions. That said, international stocks offer favorable near-term valuations, and we target 5%-10% of equity exposure to the group. In terms of growth and value, growth rebounded in 2023 and outperformed value as interest rates stabilized. Over the longer term, we anticipate that growth, led by the Tech, Consumer, and Healthcare sectors, will top returns from value, led by Energy, Real Estate, and Materials, due to favorable secular, demographic, and regulatory trends.

Our analysis of recent data leads us to conclude that key parts of U.S. GDP are still expanding (led by consumer spending), despite the impact of inflation, tight monetary policy, and geopolitics. But growth is not consistent across the economy and, in many cases, growth rates are slowing or choppy. Industrial Production notably declined in September, October, and November. There is a particular divergence between higher-income consumers, who are traveling, dining at restaurants, and splurging on special events, and lower-income households that are feeling pressure because their grocery bill is about 20% above pre-pandemic levels. While the Fed seems to be engineering a soft landing, a recession in 2024 remains possible, though we think the probability is less than 50%. We anticipate that the 4.9% GDP growth in the third quarter will prove to be the high water mark, as tight monetary policy dampens consumer spending in the first half of 2024. Our full-year estimate for 2023 is for 2.8% growth, with 2% growth in 4Q. In 2024, we expect GDP to grow 1.7%. We are forecasting sequential improvement through the year, with 0.7% growth in 1Q ramping to 2.5% growth in 4Q. This assumes inflation continues to fall and the Fed has completed its rate-hike campaign, with easing monetary policy likely beginning in the middle of the year. While 2025 will be the first year of a new presidential term, and the conviviality of the executive and legislative branches is difficult to assess, our initial forecast is for GDP to grow 2.0%. We expect the Fed to be close to meeting its dual mandate, with inflation near its 2% goal and unemployment at approximately 4.1%. We expect the funds rate to decline towards what we believe to be a long-term neutral range of 2.5%-3.0%. Based on median estimates, the Federal Reserve Board members and Bank presidents are anticipating GDP growth of 2.6% for 2023, 1.4% in 2024, and 1.8% in 2025.

The Bureau of Labor Statistics (BLS) reported that the U.S. economy generated 216,000 new jobs in December, above our forecast of 145,000 and the consensus of 170,000. November's result was revised lower to 173,000 from 199,000, and job gains in October and November were revised lower by 71,000. December's increase in payrolls took the three-month average to 165,000, below the 2023-month average of 225,000. The unemployment rate was unchanged at 3.7%. These statistics generally support our view that the job market is cooling and that there is less than a 50% chance of a recession in 2024. The Fed may not need to cut rates as aggressively as some investors expect, but the economy appears to be on solid ground. This morning's report should not change the Fed's plans to hold the funds rate at 5.25%-5.5% when it meets at the end of the month. Average hourly earnings increased 15 cents month-to-month and are now 4.1% higher year-over-year (compared to 4% in November). The average workweek ticked down to 34.3 hours in December. Job gains occurred in government, healthcare, social assistance, and construction. Employment in transportation and warehousing declined. According to a separate report from the BLS, there were 1.4 job openings in November for each person unemployed, down from 1.8 a year earlier. The ratio has averaged 0.68 since December 2000. After this morning's report, stock futures declined slightly and the yield on the 10-year Treasury rose to 4.06% from 4.30%. Before the release, futures suggested a 93% probability that the Fed will stand pat when it meets on January 30 and 31. There was little change after the release. The chance of a 25-basis-point rate cut when the Fed meets in March declined to 54% from 60%.

Our stock/bond asset-allocation model, which we call the Stock-Bond Barometer, has reversed conclusions in the past month and now indicates that stocks are the asset class offering the most value at the current market juncture. In large part, the changed reading reflects the substantial move lower in interest rates. Our model takes into account current levels and forecasts of short-term and long-term government and corporate fixed-income yields, inflation, stock prices, GDP, and corporate earnings, among other factors. The model output is expressed in terms of standard deviations to the mean, or sigma. The mean reading from the model, going back to 1960, is a modest premium for stocks of 0.16 sigma, with a standard deviation of 0.98. The current valuation level is a 0.12 sigma discount for stocks, which is now below fair value and down sharply from a 0.85 sigma premium at the end of 3Q. Other valuation measures also show reasonable multiples for stocks. The current forward P/E ratio for the S&P 500 is approximately 18, which is within the normal range of 10-21 and down from 23 at the end of 2021. And the current S&P 500 dividend yield of 1.5%, while below the historical average of 2.9%, is up from an ultralow 1.2% (also in 2021). Looking ahead, we expect the results from our valuation model to continue to improve, as interest rates decline in 2024 and EPS growth picks up. Based in part on the output from our Stock-Bond Barometer, our current recommended asset-allocation model for moderate accounts is 70% growth assets, including 68% equities and 2% alternatives; and 30% fixed-income, with a focus on core and opportunistic segments of the bond market. On duration, we recommend focusing on the short end of the curve.

Investors generally are bullish to start each year, putting new money to work in the market and often benefitting from solid market returns in January and the first quarter. To draw this conclusion, we analyzed data collected on S&P 500 performance from 1980-2023. By our calculations, the S&P 500 in January has advanced on average 1.0%, while the 1Q has generated average market gains of 2.09%. Though not as strong as returns in 2Q (2.9%) and 4Q (4.77%), the first quarter's performance gain is better than the third quarter's (0.26%). The first quarter is fairly consistent as well, with a "win percentage" of 66%. This means that stock returns are positive in 1Q roughly two years out of three, and compares to winning percentages of 65% in 2Q, 61% in 3Q, and 82% in 4Q. To be sure, 1Q has posted its share of clunkers, including 2022 (down 4.9%), when investors started to understand the scope of the Federal Reserve's rate hikes. Let's also not forget 2020, when the coronavirus emerged and the S&P 500 dropped 20%. In 2009, after the collapse of Lehman Brothers and as the U.S. economy was struggling with a deep recession, stocks fell 11.7%. And in 2001, as the "dot-com" bear market started growling, stocks fell 12%. This time around, stocks are riding positive momentum from a double-digit 4Q22. The S&P 500 might not jump the 7% it did in 2023, but falling inflation, low interest rates, and an improving earnings outlook should help stocks.

In the 40-plus years since Ronald Reagan became president, stocks have logged positive annual performances almost 80% of the time. The average annual gain has been 11%. Last year was abnormal, as the S&P 500 was up almost 25% for the year before dividends, having entered a new bull market in June. We note that the U.S. market has not had a "normal" year since 2016, with five years of above-average market returns and two negative years. Domestic investors also endured two bear markets and one pandemic-induced recession during this period. As we look to 2024, we see a stock market that is more likely to generate normal returns. We expect an uneventful start in 1H24, as interest rates and inflation steadily mover lower and earnings growth picks up. By mid-year, barring a recession, which we do not expect, stocks could be trading at record highs. Then the focus will turn toward the U.S. presidential election and volatility may pick up. Our research shows that since 1980, the fourth year of a presidential cycle has been the most challenging for the S&P 500, though we note much of the weakness can be attributed to one year (2008, when the subprime mortgage crisis slammed the financial sector in the middle of the Great Recession). At this time, the U.S. financial industry is much healthier and we estimate that an expanding economy, growing earnings, and declining inflation and interest rates might offset political uncertainty, resulting in the S&P 500 ending the year in the black. Our formal price target for the S&P 500 in 2024 is 5200, about 9% above current levels, for a more-normal year.

Next Friday, the Bureau of Labor Statistics (BLS) likely will provide further evidence that the U.S. job market is healthy, but cooling, a condition that should allow the Fed to ease monetary policy but not cause a slump in corporate profits. Our employment forecast is based on a collection of indicators. The number of job openings from the Job Openings and Labor Turnover Survey (JOLTS) published by the BLS is down 16.6% over the last year. Back in the days when we used to track newspaper help wanted ads, a 15% decline in "want ads" signaled potentially slower employment and economic growth. The ratio of job openings to unemployed, also from the BLS, suggests that the availability of jobs is cooling, but not cold. It reached a peak of 2.0 when the Fed started raising rates in March 2022 and it fell to 1.3 in October, which is still a healthy level. The ratio was less than 1 from December 2000 to December 2017 and never exceeded 1.25 between 2018 and the start of the pandemic. The JOLTS report is scheduled for January 3. The four-week average of initial jobless claims is a venerable leading indicator and has remained at benign levels between 200,000 and 250,000 for most of the year. The four-week average since 1990 is about 375,000. If the four-week average moved above 300,000 from here, it would get our attention -- but right now, it doesn't suggest that employment has cooled too much. We expect the BLS report next Friday to show that December payroll growth eased to 145,000 from 199,000 in November and the unemployment rate ticked up to 3.8%.We believe the three-month average of payrolls will drop to approximately 165,000. We are forecasting growth in average hourly earnings to fall by one tenth to 3.9% and average hours worked to tick down to 34.3. Based on analysis using a calculator from the Federal Reserve Bank of Atlanta that uses population and labor force estimates, along with an assumption that the unemployment rate will end 2024 at approximately 4.1%, we expect monthly payrolls to grow by about 60,000 over the next year.

Of the four years in a presidential term, the last year (the election year) has been the worst for investors in terms of outright performance. Since 1980, S&P 500 returns in the fourth year of the presidential term have averaged 4.8%, compared to average returns of 14.4%, 5.6%, and 15.7%, respectively, in years one through three. It is true that there have been some solid returns in the fourth presidential year, including 1980 (25.8%), 1988 (12.4%), 1996 (20.3%), 2012 (13.4%), and 2020 (16.3%). But there have been some clunkers, too, such as 2000 (-10.1%) and, most ominously, 2008 (-38.5%). Why does performance drop off? The likely reason is uncertainty. Investors favor continuity, and an election year offers a real risk for change in direction, whether to fiscal policy, trade rules, antitrust philosophy, or regulatory focus. We note that incumbents typically win re-election, but the early odds out of the U.K. favor former President Donald Trump by about 6/5; President Joe Biden's odds are 2/1. Should Trump win, industries likely to benefit could include Aerospace & Defense, which did well under his presidency, and Energy. Should Biden win, sectors such as Clean-Tech, Med-Tech, and Business Services may do well. Also, laws passed under Biden supporting infrastructure building and semiconductors should remain intact, offering opportunities in those industries. We're not going to get too worked up about the impact of this fall's election on stocks, as we note that the batting average for positive years in the fourth year of a presidential term is 80%.

By one popular definition, the stock market began a new bull market in June after the S&P 500 rose 20% from its bear-market lows set in October 2022. But there's another theory that says a bear market doesn't end until stocks reclaim all-time highs. Under that definition, the S&P 500 still needs to move more than 20 points higher to surpass the 4796 level. The bull scenario certainly seemed reasonable through July, as the S&P 500 was surging 28% from its prior depths. But from August through October, doubts were raised as stocks tumbled 10% and investors endured a correction. Since then, of course, stocks have climbed and, by our thinking, equities remain in the early stages of a bull market. Still, volatility is an issue due to geopolitical developments, high interest rates, the risk of recession, and the upcoming 2024 U.S. presidential election. On the positive side, we anticipate that the U.S. economy will steer clear of recession into 2025, the Federal Reserve will start to lower interest rates in 2024, and earnings growth is poised to accelerate over the next few quarters. The VIX Volatility Index is currently sending a more-optimistic signal. The current fear index reading is around 14, which is below the 15-year average of 20.5 and signals that investors aren't overly worried about the outlook. These readings compare to the average VIX of 24 during the most-recent bear market and 35 during the financial crisis of 2008-2009. During the long bull market in the 2010s, the VIX averaged 18 and even touched lows below 10 in 2017.

Allocating capital is one of the core competencies of the U.S. economy. That doesn't mean the industry isn't cyclical, and the recent period of high rates has no doubt been a challenge. Consider the IPO segment of the industry. The U.S. initial public offering market, which sizzled in 2021 with 1,144 IPOs and a total transaction value of $253 billion, saw a sharp downturn in 2022, with only 368 deals raising $20 billion. IPO valuations improved markedly during 2023, but activity again fell as the uncertain economic environment and still-high interest rates kept private companies on the sidelines. The asset-management and brokerage segment, which suffered from lower stock valuations in 2022, experienced improved valuations throughout 2023, which has had a positive impact on recent earnings results. The financial exchange and data segment has a strong backdrop, with higher trading volumes due to global macro developments leading to volatility across equity, fixed-income, currency, and commodity markets. But those sharply higher interest rates have pushed up the cost of financing and put a damper on the high-profile debt underwriting and merger/acquisition activity. As the Federal Reserve's rate-hike campaign nears its conclusion, we expect to see better M&A and IPO environments emerge in 2024. For more insights and ideas into the capital markets industry, see our latest Industry Review & Outlook deep dive.

The Fed's favorite inflation indicator, the PCE Price Index, will be released by the Bureau of Economic Analysis (BEA) this morning. The index differs from the better-known Consumer Price Index in that its composition is changed more frequently and it is quicker to reflect real-time pricing fluctuations. In the October report, PCE inflation was reported at 3.0% (the latest CPI report, from November, had inflation at 3.1%). Core PCE, which removes volatile food and energy prices, was 3.5% in the latest month, down from 3.7% in the prior month. Our forecasts call for declines in both PCE rates: 3.4% for the headline number and 2.9% for the core. Overall, inflation in this cycle peaked in summer 2022 and has been on a downward trek. We track 20 inflation measures. On average, they are indicating that prices are rising at a 2.6% rate year-over-year, down from 2.8% a month ago. The numbers are distorted somewhat by a sharp decline in Producer Price Intermediate Goods, which are falling at a 13% rate and likely point to easing prices across the inflation spectrum in the months ahead. Focusing on core inflation (which we obtain by averaging Core CPI, market-based PCE Ex-Food & Energy, the core GDP PCE Price Index, the five-year forward inflation expectation rate and the 10-year TIPs Break-even Interest Rate), our reading is 2.84%, down 13 basis points month-over-month. That's lower, largely because, at long last, sticky prices like shelter and transportation are starting to ease. Investors are expecting that the Fed's series of rate hikes ultimately will tame inflation, with the five-year forward expectation rate at 2.24%.

Take a few minutes to enjoy this morning's GDP report. We may not see another this good for a while, as the lagging effects of tight monetary policy seem likely to dampen spending and investment. This morning's release from the Bureau of Economic Analysis (BEA) will be the third update of 3Q GDP. Last month's update indicated that 3Q real GDP rose at an annualized 5.2% pace, up from 2.1% growth in 2Q23, with strong contributions from consumer spending, private investment, exports, and government spending. We don't expect a major revision to GDP this morning. Between 1996 and 2022, the average absolute revision to the quarterly percentage change in real GDP was just 30 basis points, according to the BEA. After the second release, we were impressed that personal consumption expenditures on durable goods increased 6.8% despite a decline in motor vehicles (and parts). Gross domestic private investment in structures rose 6.9% after a 16.1% increase in 2Q and a 30% increase in 1Q. A report from the U.S. Treasury Department attributed the recent surge in construction to spending on manufacturing facilities for computers, electronics, and electrical products (bolstered by the CHIPS Act), adding that these categories have become a dominant component of manufacturing construction after a few decades of relatively small share. On January 25, the BEA will release its advance estimate for 4Q GDP. We expect 4Q23 growth to slow to 1.6%. For 2024, we expect growth of 0.6% in 1Q, 1.5% in 2Q, 2.3% in 3Q, and 2.9% in 4Q. Retail sales were strong in November. If consumers splurge in December and holiday sales top our 3% estimate, our analysis will focus on whether job opportunities, wage growth, consumer sentiment, and inflation declines are enough to support momentum or if consumers appear to be burdened by credit card bills as we start the new year.

In early December, the Bank of Canada maintained its target overnight interest rate at 5.00% after a similar move in September, with the central bank noting that "The global economy continues to slow and inflation has eased further." In a sign of that slowing, the Canadian economy unexpectedly contracted by an annualized 1.1% in 3Q, well below the 0.2% growth rate expected and down from a revised increase of 1.4% in 2Q, as higher interest rates took their toll and led to flat consumer spending, while exports and inventory accumulation also weighed to the downside. Lower energy prices, with crude oil contracting some 25% since late September, could also turn into a significant headwind, given the Energy sector's outsized contribution to the Canadian economy. Similar to the U.S., a majority of Canadian economists see the Bank of Canada beginning to cut interest rates by mid-2024 as the lag effect of higher rates begins to have a greater impact on housing and other sectors. We believe select companies in our Canadian coverage continue to offer investment opportunities, with the potential for lower rates in 2024 helping the Financial Services sector in particular.

Last week the 30-year mortgage rate dipped below 7% for the first time since August and the 10-year Treasury yield dropped below 4% for the first time since July. That should be a holiday surprise for home shoppers. Earlier this month, Douglas Yearley, the CEO of luxury homebuilder Toll Brothers, said he was "encouraged" by the recent decline in mortgage rates. "With inflation easing over the past few quarters, we believe rates may drop further and the timing of the rate decline is setting up nicely for the upcoming spring selling season," he added. On November 13, the Federal Reserve Bank of Philadelphia released its Survey of Professional Forecasters. Survey participants expected the 10-year Treasury note to yield 4.47% in 1Q24 and 4.39% in 2Q24. If interest rates remain lower than the 1Q24 and 2Q24 levels that forecasters expected, interest-rate-sensitive sectors, such as housing, could perform better than the survey participants expected. New housing starts could surpass the approximately 1.35 million seasonally adjusted annual rate (SAAR) that was predicted for 1Q24 and 2Q24. The Residential Fixed Investment component of GDP could exceed the $726 billion (SAAR) that survey participants expected for 1Q and the $723 billion (SAAR) they expected for 2Q. On December 19, we expect the Commerce Department will report November Housing Starts of 1.35 million (SAAR). On December 20, we expect the National Association of Realtors will report November Existing Home Sales of 3.8 million (SAAR). We expect the Commerce Department to report November New Home Sales of 685,000 (SAAR) on December 22. The S&P/Case-Shiller National Home Price Index for October will be released on December 26. It jumped 3.9% in September. We expect a gain of about 2% for October. The Zillow Home Value Index was up 1.8% in October. In this evolving housing market, Argus recommends Lennar, D.R. Horton, and Toll Brothers -- companies with solid financial strength that are adapting to market conditions.

The approximately $2.3 trillion cryptocurrency market (Bitcoin, Dogecoin, Ethereum, stablecoins, etc.) has been soaring from the $1.3 trillion level as central banks appear to be winding down rate-hike campaigns and a risk-on mentality returns. Year-to-date, Bitcoin is up more than 150%, though it is still down 35% from all-time highs established in November 2021. In theory, consumers, investors, and traders all have reasons to like Bitcoin. For consumers, cryptocurrency can cut the middleman out of a transaction of value. But we think crypto volatility is too high to consider paying for a tank of gas (or even a Tesla) with Bitcoin. For traders, the ups and downs of the various cryptocurrencies are a major opportunity -- as long as they are on the right side of Elon Musk's tweets, or rapidly changing Chinese crypto rules, or the developing regulatory framework in the U.S. Investors wonder how far crypto is from becoming a mainstream security. We estimate the global equity market capitalization is approximately $110 trillion. Gold is about $12 trillion. For crypto to make it on the radar of most investment managers, we expect it would need to approximately triple in value to $5-$7 trillion. Then it could account for 2%-3% of total portfolio assets and could be used as a growth alternative. By then, there also might be more uses for and regulations to define the asset class (perhaps an ETF based on spot prices early next year), and more fundamentals to support valuation.

When global economic conditions become unpredictable, investors often flock to gold. The yellow metal is currently trading around $2,000 per ounce, up 12% for the year; over the past five years, the range for gold prices has been $1,275-$2,075. During the first phase of the pandemic, the spot price for an ounce of gold jumped 33% in six months and broke through the $2,000 level. Gold spot prices also spiked above $2,000 in early March 2022 due to the war in Ukraine, and are now at similarly high levels as tension builds in the Middle East. The current price of gold reflects the perceived safety of hard assets amid the global conflicts, as well as lower U.S. interest rates that tend to weaken the dollar, which is how the currency is priced. The outlook for Federal Reserve rate cuts also helps gold, as lower rates lower the risk for a global economic recession and thus a potential decline in gold purchased for jewelry. By our reckoning, gold prices have averaged $1,950 for 2023, above our forecast for $1,850. Our forecast trading range for gold in 2024 is $2,200-$1,700, and our average forecast for the year is now $2,000. This compares to average gold prices of $1,806 in 2021, $1,781 in 2020, $1,400 in 2019, $1,265 in 2018, $1,277 in 2017, $1,258 in 2016, and $1,155 in 2015. In conclusion, as long as geopolitics and global economic uncertainty are part of the market conversation, the price of gold is likely to remain at levels well above the historical average.

The Federal Reserve wrapped up its latest Open Market Committee meeting on Wednesday and, as expected, held the federal funds rate steady at 5.25%-5.50%. This was the third pause following a hike in July, which was the eleventh increase to fed funds over a period of 16 months. The fed funds rate remains at its highest level since 2000 and is above the long-term average of 4.4%. The hikes so far have been working to reduce inflation. The latest core CPI reading was 4.0%, down from 9.1% in July 2022; the latest core PCE Price Index reading was 3.5%. (Despite the downtrends, both of course are still well above the Fed's target of 2.0%.) The decision on Wednesday was widely expected, and the real drama from the meeting, if anywhere, was in the Summary of Economic Projections report that was published by the central bank after the meeting concluded. In the previous report, the central bank had indicated that it felt one more hike would be coming in 2023, and Fed Chairman Jerome Powell pointedly did not rule out more hikes in 2024 in his remarks yesterday. But nobody was really paying attention. Looking ahead to 2024, the Federal Reserve is preparing investors for rate cuts -- as many as three. According to the latest fed funds "dot plot" forecasts by the governors, the central bank's target for the rate at year-end 2024 is 4.625%. The easing is expected to continue into 2025 and 2026, at which point the federal funds rate should be below 3.0%, according to the Fed's forecasts. Fixed-income traders are not so sure, as the current three-year Treasury yield is still 4.2%. But equity investors are seemingly all in, and the Dow Jones Industrial Average has closed at a new high above 37,000, just in time for the holiday season.

The top-level inflation rate in the U.S. fell to the lowest level since September 2021 on a year-over-year basis last month, as most price increases appear to be easing. The rate of core inflation also continued to tick lower. The CPI numbers generally were in line with consensus expectations and Argus forecasts. The Bureau of Labor Statistics reported a 3.1% increase in overall inflation year-over-year through November, compared to a 3.2% rate through October and a 9.1% rate back in June 2022. The core rate, excluding the impact of food and energy, was steady versus the prior month at 4.0%. Month-over-month, the all-items CPI ticked higher by 10 basis points, and the core CPI increased 30 basis points. Segments of the economy with stable/easing prices year-over-year included Energy (-5.4%), Used Cars & Trucks (-3.8%), and Medical Care Services (-0.9%). New Vehicles and Apparel prices increased at annual rates of 1.3% and 1.1%, respectively. Inflation rates continue to be propped up by Transportation Services (10.1% yoy) and Shelter (6.5%). These categories tend to have stickier prices. We continue to think the June 2022 CPI rate was the peak reading for the index this cycle, as the housing market cools off, supplies of new vehicles are replenished, and the price of oil stays below $90 per barrel. The Fed has lifted the feds fund rate from 0.0% to above 5.25% over the past 18 months, and the rate hikes appear to be reducing inflationary pressures. The next question is whether the rapid rate of increases will tip the economy into a recession as inflation continues to head toward 2.0%. We look for the U.S. central bank to be lowering rates in 2H24 as their concern shifts toward economic growth.

Global economic growth is expected to slide in 2023 and inch even lower in 2024, according to the latest World Economic Outlook from the International Monetary Fund (IMF). Growth in 2023 is the same in the latest forecasts as previously forecast in the summer. But 2024 dropped slightly this round. The IMF said that growth is predicted to remain "weak" by historical standards. By the numbers, the world economy is expected to expand 3.0% in 2023 and then 2.9% in 2024, after having grown 3.5% in 2022. All of these rates are below the long-term historical global growth rate of 3.8%, due largely to the impact of inflation and higher interest rates. For industrialized economies (the U.S., Europe, Japan, etc.) growth is forecast at a miniscule 1.5% in 2023 and an even lower 1.4% in 2024. The U.S. is expected to generate growth of 2.1% in 2023, with a drop to 1.5% in 2024, according to the IMF. This is better than the prior forecast. For emerging economies (China, India, Russia, Brazil, Saudi Arabia, etc.), forecasts call for growth of 4.0% in both 2023 and 2024. The clear leaders are expected to be China and India, with average growth for the two years of 4.6% and 6.3%, respectively. Even those growth nations have different drivers: population growth in India and productivity growth in China, as GDP/capita increases. We factor global growth forecasts into our asset-allocation models -- and based in part on the slow global growth rates, we continue to recommend that investors over-weight portfolios toward U.S.-based securities. Global stocks generally represent value, but the risks to growth are high.

We have reviewed our recommended sector allocations this month and are maintaining our current sector Over-Weight, Under-Weight, and Market-Weight recommendations. Our six-part model awards or subtracts a point for each metric; sums all points to determine an all-sector score; divides by the number of sectors (11) to set an average sector score; and determines recommended sector weighting based on sector score in relation to sector average. The multi-stage model includes: a performance ranking system, which assigns points for monthly, quarterly, and YTD sector performance versus the benchmark (S&P 500); current sector P/E versus 5-year P/E, with points awarded for discount to S&P 500 current versus 5-year P/E delta; two-year earnings growth, with points awarded for exceeding benchmark average and for EPS acceleration; relative performance to the sector group average; sector conviction, meaning BUY rating percentage per sector versus total Argus BUY rating percentage; and PEG ratio, with points awarded or subtracted based on sector PEG ratios below or above the group average. This time, our process yielded 40 total points, for an average sector score of 3.6. To earn a recommended over-weight designation, sectors had to score five points or above; for market-weight, three or four points; and for under-weight, two points or below. Our current Over-Weight sectors remain Communication Services, Financial Services, Consumer Discretionary, and Technology. Our current Market-Weight sectors are Materials, Industrials, Healthcare, Real Estate, and Utilities. Our Under-Weight sectors are Energy and Consumer Staples.

The U.S. economy generated 199,000 new jobs in November, above our forecast of 145,000 and the consensus of 180,000. October's result was unrevised at 150,000. November's increase in payrolls took the three-month average to 204,000, which is below the 12-month average of 240,000. The unemployment rate dropped to 3.7% from 3.9%. These statistics support our view that the job market is cooling and that there is less than a 50% chance of a recession in 2024. This morning's report from the Bureau of Labor Statistics (BLS) should not change the Fed's plans to hold the funds rate at 5.25%-5.5% when it meets next week, but it may delay the timing of a rate cut. Average hourly earnings increased 12 cents month-to-month and are now 4.0% higher year-over-year, consistent with October (which was revised lower). The average workweek ticked up to 34.4 hours in November. Job gains occurred in healthcare and government. Employment also increased in manufacturing, as workers returned from a strike. Employment in retail trade declined. Employment was little changed in mining, quarrying, and oil and gas extraction; construction; wholesale trade; financial activities; professional and business services; and other services. Job gains in September and October were revised lower by 35,000. According to a separate report from the BLS, there were 1.3 job openings in October for each person unemployed. This is down from 1.7 a year earlier. The ratio has averaged 0.68 since December 2000. After this morning's report, stock futures were little changed and the yield on the 10-year Treasury rose to 4.23% from 4.19%. Before the release, futures suggested a 98% probability that the Fed will stand pat when it meets next week, with no change after the release. The chance of a 25-basis-point rate cut when the Fed meets in March declined to 47% from 50% before this morning's report.

November was a blast for investors, as stocks jumped 9% and bonds rose 4%. Year-to-date, stocks still hold the performance lead over bonds, with a 19% gain in the benchmark S&P 500 compared to a 1% decline for fixed income through November. Looking ahead, our Stock-Bond Barometer model modestly favors bonds over stocks for long-term portfolios. In other words, these asset classes should be near their target weights in diversified portfolios, with a slight tilt toward fixed income. However, equity valuations are improving. We are overweight on large-caps. We favor large-caps for growth exposure and financial strength, while small-caps offer value. Our recommended exposure to small- and mid-caps is 12%-13% of equity allocation, below the benchmark weighting. U.S. stocks have outperformed global stocks over the trailing one-year and five-year periods. We expect this long-term trend favoring U.S. stocks to continue, given volatile and erratic global economic, political, geopolitical, and currency conditions. That said, international stocks offer favorable near-term valuations, and we target 5%-10% of equity exposure to the group. In terms of growth and value, growth has rebounded in 2023, outperforming value as interest rates have stabilized. Over the longer term, we anticipate that growth, led by the Tech and Healthcare sectors, will top returns from value, led by the Energy and Materials sectors, due to favorable secular, demographic, and regulatory trends.