The just revised fourth quarter GDP report and current estimates for the first quarter of 2024 suggest a still healthy economy, despite the restrictive Federal Reserve (Fed) interest rate policy.

Highlights for this week include:

The just revised fourth quarter GDP report and current estimates for the first quarter of 2024 suggest a still healthy economy, despite the restrictive Federal Reserve (Fed) interest rate policy.

The resilient economic performance, which is exceeding consensus estimates, continues to support better-than-expected profit growth. This provides a positive backdrop for stocks where stock market internals and other important indicators remain encouraging.

Economic Indicators Consistent with a Resilient Economy

The just released revision to fourth quarter GDP showed growth coming in at 3.2%, which follows the third quarter’s impressive 4.9% rate. The strong second-half performance brought the total 2023 growth rate to 2.5%, up from 1.9% in 2022. Consumer spending remained the dominant driver of growth, up at a 3.0% annualized rate, as services spending was revised up, led by health care.

Real final sales to private domestic purchasers, which exclude inventories, net exports, and government spending, were revised up to a 2.9% annualized rate from 2.6% initially. The average growth rate in 2023 was 2.8%, up from 0.8% in 2022. The acceleration highlights the resilience of the private sector, despite restrictive Fed policy.

Turning to the first quarter of 2024, the incoming data is once again suggesting solid economic growth. The Atlanta Federal Reserve GDPNow forecasting model estimates first quarter 2024 GDP growth of 3.0% as of February 29. The Personal Income and Outlays report for January showed personal income up a better-than-expected 1.0% m/m and 4.8% y/y, with personal consumption up 0.2% m/m and 4.5% y/y, consistent with a positive start to the year. While the Conference Board’s Consumer Confidence Index saw its first decline in four months, confidence is still higher than a year ago and remains consistent with continued economic expansion.

Stock Market Internals and Other Indicators Remain Constructive

Large-cap indices, including the S&P 500, Nasdaq 100, and Dow Jones Industrial Average, recently reached new all-time highs and remain in up-trends. While there has been a lot of concern over the narrow mega-cap technology-related leadership, we are seeing encouraging trends develop within mid-cap, small-cap, and micro-cap stocks that suggest broadening participation in the current bull market.

The equal-weighted Consumer Discretionary vs. Consumer Staples ratio just hit a new two-plus year high, an indication of cyclicals outperforming defensives and a sign of a risk-on market. The defensive Consumer Staples and Utilities sectors continue to underperform while the cyclical Industrials is at an all-time high. The spread between high-yield corporate bond yields and Treasury bond yields, a closely watched indicator of economic health, is at a new two-year low in another sign of a healthy economy and a risk-on environment.

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