Wall Street wins continue as investors remain optimistic about soft landing

MANHATTAN (CN) — The wins continued for Wall Street, as two key economic measures — personal consumption expenditures and gross domestic product — came in better than forecast.

Two out of the three indices once again set new records this week, with the Dow Jones Industrial Average gaining 246 points for the week to hit 38,109, while the S&P 500 rose 51 points to hit 4,890. The Nasdaq, dinged by tech companies’ earnings, picked up 145 points.

On Friday morning, the U.S. Bureau of Economic Analysis released its latest inflationary data, which showed the personal consumption expenditures increased by 0.2% last month. Annual inflation is now at 2.6%, with core inflation — which excludes food and energy prices — at 2.9% for the year.

Both investors and analysts were pleased with the news but they also cautioned against too much celebration, particularly given how the Federal Reserve will react to the data.

Jeffrey Roach, chief economist at LPL Financial, said “the Fed has further work to do and should not be tempted to declare ‘mission accomplished.” He added that investors “shouldn’t be surprised to see a temporary uptick next month in goods inflation from disruptions in shipping.”

Experts predict the Fed will begin discussion on to start cutting rates at its upcoming meeting next week, with cuts coming as soon as March. However, it is also possible the hawkish members of the central bank will convince the Fed to wait until the second quarter before easing interest rates.

Wall Street enjoyed more good news from the Bureau of Economic Analysis the day before, when the agency released its advance estimate for gross domestic product in the fourth quarter of 2023. The U.S. economy grew by 3.3% annualized, with real GDP increasing 2.5% in total last year, the agency stated.

The quarterly number was significantly lower than the 4.9% growth in the third quarter but much better than the 2% economists had predicted. Prior to the spike in GDP in the third quarter, growth had been steadily dropping since mid-2022.

“Looking ahead, we continue to see a soft landing as the most likely outcome this year even if a collection of headwinds and risks remain that recession odds are around 35%,” Lydia Boussour, senior economist at EY-Parthenon, said on Thursday after the GDP release.

Boussour said the economy is definitely cooling, noting Main Street and Wall Street both remain vigilant, with consumers dealing with “cost fatigue” and business leaders contending with softer demand growth and still-high interest rates.

Perhaps even more importantly than economic growth, the GDP report also found that inflation has ticked down again, with the price index rising by just 2.4% , close the 2% goal set by the Federal Reserve.

Roach said the keys to 2024 will be the labor market and disposable income, though he warns upcoming jobs data could be rocky. “The recent winter storms that swept across the country could distort the upcoming payroll report so investors should keep an eye on that potential drama,” he said.

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