HCM Quarterly Review Q1 2024
The market traded erratically to start the year, trying to find its footing after 2023. No real surprise, a period of consolidation was warranted and needed for the market to move higher. We reduced exposure to bonds early this year as the bond market started to turn over, and patiently waited for a bond trade to set up. We do expect the bond market to be very active this year, and we do see a lot of opportunity in this area.
CPI inflation surprised to the upside in December, largely driven by persistent shelter price growth. Services ex-energy and shelter inflation, or the super-core, Chair Powell’s preferred gauge of underlying price pressures, also picked up at year-end and continues to run at about double its pre-pandemic pace. While inflation has made great strides down from its peak in 2022, it ended 2023 well above the Fed’s target of 2.0%. Given some upside risks from a rebound in existing home prices, tight labor markets, and geopolitical conflicts that may raise transportation costs and disrupt supply chains, the disinflation path ahead will likely be slower and choppier.
Furthermore, the January CPI print brought a reality check to the markets. The HCM-BuyLine® remained strong. The markets were overbought, and a pullback was warranted. The CPI number was just the nudge the market needed to cool things off a bit.
The Labor department CPI showed a 0.3% rise in prices vs. the 0.2% increase expected. The year-over-year number rose to 3.1% vs. the 3.0% projected. The January core number, which strips out food and energy, increased 0.4% vs. the 0.3% forecast. On an annual basis, prices rose 3.9% vs. the 3.7% prediction. Stocks felt the impact. The Dow declined 1.2% in the first hour of trading. The S&P 500 also pulled back 1.37% for the day, sending the benchmark index back below the 5,000 level. The December and January CPI Reports were not conducive to a Fed rate cut in March. We continue to expect the first cut to come in Q2, most likely in June.
The Conference Board’s CEO Confidence Index rose seven points in Q1 to 53, above 50 for the first time in two years, indicating growing optimism among executives. Both current conditions and expectations for the year ahead improved. CEOs had a net positive assessment not only of the broad macro economy but also of conditions in their own industries. Despite the more positive economic outlook, hiring plans for the next 12 months declined. The share of CEOs who plan to lay off workers jumped to 23% from 13% in the previous quarter, while those who plan to grow their workforce slipped to 35% from 38%. The report attributed this net decline in hiring plans to be letting up of labor hoarding that characterized most of last year. It suggests a moderation in labor demand and easing in labor market conditions in 2024. Within the context of a continued economic expansion, however, this implies sustained productivity gains and is a tailwind to profit and margin growth.
In special questions, CEOs identified political uncertainty ahead of the U.S. presidential election as their main challenge this year. Global downside risks included the spread of current wars, de-globalization, and U.S.- China tensions. Upside risks included falling inflation, Fed rate cuts, and a resolution to current geopolitical conflicts.
Riding the Wave: Navigating Fed Meetings and Inflation Surprises
The HCM-BuyLine® remained positive and pullbacks were seen as a buying opportunity. The market did feel a bit overextended, but there still remained $6.1 trillion on the sidelines, and that’s a staggering a mount of liquidity. The technical looked good and inflows have been positive. In our opinion, the Fed is done raising rates for this cycle, but it will be restrictive for longer.
In our opinion, the Fed is done raising rates for this cycle, but it will be restrictive for longer.
The Consumer Price Index (CPI) increased 0.4% in February, the most in six months, and matching the consensus. Food prices were flat, while energy prices rebounded 2.3%, up for the first time since September, led by gasoline. Excluding food and energy, core CPI also rose 0.4%, practically the same as in the prior month, and above the consensus of 0.3%.
CPI inflation came in slightly above expectations in February, driven by higher energy and rent prices. Underlying price pressures showed few signs of easing. The three-month annualized rate of change of core CPI picked up 4.2%, the most since last May. Super-core inflation barely eased to 4.3% y/y from 4.4% y/y in the month before, still running much higher than pre-pandemic. Such firm underlying price pressures are not conducive to Fed rate cuts. Although market expectations still favor the next easing cycle to begin in June, there is a risk of later or fewer rate cuts than currently priced in, if inflation pressures persist.
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