Happy New Year!

Major US stock market indexes have fallen back in the New Year (Dow -.6%; S&P 500 -1.2%; Nasdaq -2.6%). This isn’t surprising given last quarter’s huge rally as well as seasonal tax-related selling. But I’m sure the news media will make much of it. We’re seeing the same trend in bonds. Last quarter falling interest rates drove a strong rally, which seemed to run out of fuel as the calendar ticked over. This is all part of the normal ebb and flow of markets.

I can’t emphasize how important interest rates are, because they mirror both Federal Reserve policy as well as longer-term inflation expectations. And Fed policy is supposed to take its cue from inflation. While inflation was high, rates rose. But now that inflation is fairly low and still falling, rates have adjusted lower. Fed officials are talking openly about potentially lowering short-term rates some time this year. And long-term rates (i.e. mortgages at 7% vs. 8%) are already adjusting.

Research firm ISM says its US manufacturing survey improved a bit last month. Business activity throughout the sector looks to have “stabilized at a weak level,” according to Bloomberg News. Factories are still suffering from a Covid hangover, with current production levels, new orders, and hiring contracting. One bright point in the report, however, is that the cost of doing business is lower. Commodity prices have crashed, the cost of borrowing is down a bit, and wage inflation is slowing. Those factors are good for profit margins, and ISM predicts 2024 will be a year of recovery for US manufacturers.

According to a Bureau of Labor Statistics report, the number of unfilled job positions fell in November to the lowest level since early 2021. At 8.8 million, the figure is still well above average but the trend is clearly lower. Balance is returning to the job market. Voluntary quit rates are back down to late 2020 levels, suggesting workers are less confident about jumping ship and quickly finding another job. Most economists think this will push wage growth lower and help convince the Fed that inflation is no longer a problem.