Overall the economic reports last week were positive for equities, even though bond yields rose after their very steep decline over the last two months. Data was trending soft recently—not recession level but indicating soft activity. That tone reversed last week.

Then the labor market report last Friday confirmed underlying health. The new jobs number came in pretty much with expectations, except the unemployment rate which dropped from 3.9% to 3.7%. This drop of unemployment is why bond yields jumped over 10 basis points (bps). 

Year-over-year wage growth was 4% but given how strong the productivity numbers have come in, this is not inflationary. In fact, unit labor costs are negative this year, so I do not regard data on the labor front as inflationary. I also like that the labor participation rate ticked up one tenth—this brings in further slack and lowers wage pressures. The household jobs report was also very strong, reversing some of the losses in the previous month. Of course, that report is much more volatile because of the smaller sample size.

We also received really good numbers from the University of Michigan Consumer Sentiment surveys. One-year inflation expectations dropped from 4.3% to 3.1%—one of the biggest one-month drops in this survey I have ever seen. The five-year inflation expectations dropped from 3.1 to 2.8%. 

So, a cautionary tale: don't put any credence in the one-year-ahead forecast of the FOMC(Federal Open Market Committee). Jerome Powell (Chair of the Federal Reserve) will want to keep optionality of raising rates, particularly if there is a hot inflation report. But the data—commodity prices, oil prices and everything else—do not look inflationary.

The primary risk to equities in the first half of 2024 is a Fed that remains too stubborn to see the downward inflation path. If Powell is overly stubborn, we could see up to a 10% correction in the first half of the year, but I expect 2024 to close fairly strong once the Fed finally gets it.

The technicals of the market currently look quite strong, and I see December continuing these positive trends. I see the 10-year Treasury not going much below 4% and Fed funds rate down to 3.5% by year end. Given what I see for earnings, I think the equity market is poised to perform well, and while I expect the productivity trends from advances in technology to support real economic growth, there could be a broadening participation in equity markets beyond the Magnificent 7 tech stocks.
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The above article is commentary from Professor Jeremy Siegel a world-renowned expert on the economy and financial markets. Siegel is the winner of dozens of awards for his research, writing, and teaching. He served for 15 years as head of economics training at JP Morgan and is currently the academic director of the U.S. Securities Industry Institute.