Too Much of a Good Thing?

Mark Luschini, Chief Investment Strategist

Around the middle of last year, the consensus outlook for the economy shifted to discount the odds of a recession, and now many believe that a soft landing is the most likely outcome. This view was reinforced following the Federal Reserve’s (the Fed) December policy meeting as the Summary of Economic Projections that accompanied the announcement of no new rate hike showed committee members have penciled in three cuts in 2024 amidst expectations of falling inflation and still positive economic growth.

It is worth asking, however, whether, in pursuit of a soft landing, could the Fed make a policy mistake by easing off its monetary restraint too soon? To be sure, everyone would opt for a soft economic landing if it could be guaranteed. But lacking that assurance one should consider the consequences if the effort fails and inflation stays high or even reaccelerates.

Year in Review

Guy LeBas, Chief Fixed Income Strategist

Once again, we are continuing our tradition in the fixed-income markets to take the first Investment Perspectives of the new year to reflect on major market themes from the prior year. The level of interest rates continues to be a significant driver of valuations across not just bond, but also stock and commodities markets—one need not look further than the nearest financial television program to figure out that much. Although this connection seems natural, the reality is that the impact of the level of interest rates on other financial markets varies considerably, and usually in proportion to the volatility of interest rates. As noted in Janney ISG’s Outlook 2024, we anticipate volatile but trending bond markets in the new year, an extension of 2023’s experience.

The primary market trend in 2023 was four distinct trading regimes, which felt almost seasonal. In winter, focus on further Fed rate hikes had yields rising rapidly. In spring, the regional banking crisis had yields falling for safety reasons. In late summer, U.S. Treasury supply pushed yields to their highest levels in more than a decade. And in late fall, those concerns faded abruptly. The net result was that interest rates ended the year violently unchanged. 10-year Treasuries ended at 3.88% after starting the year at 3.87%, marking the smallest change in interest rates in any year in contemporary history. Shorter-term interest rates actually fell, with two-year Treasuries ending at 4.25% after starting the year at 4.43%, the smallest change in short rates since 2016.

Hoping for an Encore

Gregory M. Drahuschak, Market Strategist

The stock market ended 2023 with a stunning two-month flourish that sent the S&P 500 to 3.26 points shy of its all-time intraday high and 15.32 points away from the closing high. The index posted its fourth-best November and the 15th-best December results since 1950. The S&P 500 gained more than 16% from the October low to set multiple 52-week highs.

Continue to read full PDF