U.S. Stocks market update: Strong Economy Becomes a Block for U.S. Stocks

U.S. Stocks market update, despite a robust economic performance, concerns about inflation are casting a shadow over Wall Street, making it a potential stumbling block for U.S. stocks.

Strong Economy vs. Plummeting Stock Market

The U.S. economy is thriving, yet the stock market has plummeted, primarily due to fears that robust economic growth will hinder inflation from returning to pre-pandemic lows.

Last Friday's latest non-farm payroll data revealed that the U.S. added 256,000 jobs in December, with the unemployment rate declining. Bernard Baumohl, Chief Global Economist at the Economic Outlook Group, stated, "The economy is entering the new year with quite a bit of momentum."

This week’s data may reflect similar trends: strong retail sales during the holiday shopping season signal the resilience of the U.S. economy, alongside persistently high CPI and PPI figures from December, which the incoming Trump administration might exacerbate.

Economic Policies of the Incoming Administration

President-elect Trump has pledged to boost economic growth through tax cuts and deregulation. However, stronger U.S. economic growth, combined with Trump’s promised higher tariffs, could make it more challenging for the Federal Reserve to bring inflation down to its 2% target.

In addition, increased consumer demand for goods and services, coupled with rising labor costs to produce those goods and services, may drive inflation higher again.

Sam Bullard, a senior economist at Wells Fargo, noted, "Inflation has progressed slowly over the past year, emphasizing that the final stages of bringing inflation back to target remain very difficult. The economic policies of the incoming administration may lead to inflation, making the road ahead look more challenging."

Market Reaction to Fed Rate Expectations

The decline in the stock market last Friday was largely a reaction to the realization that the Fed may not cut rates as significantly as Wall Street had anticipated a few months ago. Lower interest rates typically stimulate the economy and make stocks more attractive relative to bonds.

On the flip side, a strong economy often boosts corporate profits, justifying higher stock prices. So, what’s the concern?

Some economists worry that the Fed may not lower rates in 2025 and could even be forced to raise them to regain control of inflation. This would be bad news for the stock market and could threaten the economic expansion that has lasted four years. Baumohl questioned, "Is the Fed’s strategy to control inflation beginning to unravel?"

Most economists, including Baumohl, are reluctant to go that far. However, the current situation looks vastly different from last fall when the Fed was actively cutting rates and signaling further cuts. Now, Wall Street’s primary concern is a rebound in inflation.

CPI Trends and Forecasts

CPI data has shown signs of an upward trend for four consecutive months, with the annual rate rising from 2.4% at the end of summer to 2.7% in November, and possibly reaching 2.9% in December.

The latest market expectations indicate a 0.2% month-over-month increase in the CPI, with the core CPI—excluding food and energy—projected to slightly slow to a 0.2% increase, while the year-over-year rate may remain at 3.3%.

PPI Projections

Market forecasts also anticipate a 0.3% month-over-month increase in last year’s PPI, with the year-over-year rate exceeding 3% to reach 3.4%.

Retail Sales Outlook

In itself, the U.S. economy appears to be ending 2024 on a strong note, with retail sales during the final phase of the holiday shopping season expected to grow by 0.5%.

Consumer Spending Dynamics

Economists note that low unemployment, rising incomes, and the wealth effect from soaring stock and housing prices enable consumers to increase their spending. Consumer spending is a primary engine of the U.S. economy.

Employment Stability

In turn, resilient consumer spending prevents businesses from laying off workers. Expectations of a business-friendly White House may even lead to more hiring, as suggested by recent employment reports. Morgan Stanley economists wrote in a recent client report, "The U.S. is starting the new year on a solid footing."

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Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.