Channeling Goldilocks

By Aoifinn Devitt, CFP® – Chief Investment Officer

As the holidays approach, there is a miracle in the air.  But not the usual festive kind.  Consumers were already starting to expect lower inflation – and Tuesday’s CPI print came in a notch lower than expected – at 3.2% (core, ex energy and food was 4%), the lowest level since June 2021. Excitement is building that the US Fed might just have pulled off the impossible –taming inflation without generating a recession, and markets caught a burst of holiday cheer.

This pattern is being repeated around the world – the UK recently showed inflation numbers that were the lowest in two years, reflecting the exact similar dynamic in the Eurozone.  Rate hikes can now be deemed to be comfortably on hold. A question may be asked as to what now?

Is this another version of a goldilocks economy – not too hot, with inflation in check and the consumer subdued, but not too cold either – employment remains supported, retail sales are strong and company earnings are buoyant.  Commentators are divided as to whether the “hard part” of inflation has now been beaten – or whether it is the “hard part” that now lies ahead . . that last 1-2% to get it back to the elusive 2% level. Time will tell evidently.

With equity markets the buoyant mood spread outside the ever-hot tech sector notably too – with Target richly rewarded for its positive earnings in a sign that investors are happy to go a little  broader in equities.

81% of S&P 500 earnings have reported a positive EPS surprise, and 61% of S&P 500 companies have reported a positive revenue surprise. The strongest sectors for earnings growth are healthcare, energy, communications services and information technology. So far, not all of these sectors have been rewarded by investors.  We expect Target to be a signal of an ongoing dispersion of some of the equity sentiment more broadly and convincingly. The healthcare sector would certainly welcome investor interest matching its positive earnings news.

Source: Morningstar as of 11/15/23

But it is not all about joy. Moody’s last week decided to lower the outlook on the US to negative from Stable, which follows the other agencies Standard and Poors and Fitch who had previously moved the US a notch lower. The rumblings behind the scenes of budget deficits and political dysfunction don’t remove this uncertainty, and in the year ahead political warfare will add to it.


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