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Market takes a breather after rally; strong jobs data bodes well for future.

After a meteoric rise in recent months, the stock market has pulled back slightly over the past two days, a normal course correction following such gains. While some sectors like “Mag 7” performed well in 2023, broader participation is needed for sustained growth.

Despite the recent dip, the underlying fundamentals remain strong. The economy is still humming along, albeit at a slightly slower pace, inflation appears to be contained, and the prospect of lower interest rates in the future paints a rosy picture for stocks.

The December jobs report provided further evidence of the economic resilience. Private sector payrolls jumped above expectations, led by a rebound in the leisure and hospitality industry. While wage growth is still above historical averages, it has cooled from earlier peaks, alleviating concerns about a wage-price spiral.  Initial jobless claims dropped to 202k.  This is just another sign of a very strong economy.

Additionally, retail sales have increased, with record consumer spending during the holiday season. High consumer confidence and spending levels are positive signs, though there is caution regarding how consumers will manage increased credit card and debt payments over the next six months.

There are headwinds in the middle east and the Red Sea are reasons for concern.   The price of Oil has been volatile, but it hasn’t had a huge impact on the market.   Although the market will be very alert to potential issues, global conflicts haven’t had an impact on the US economy or stock market.

The market’s recent pullback is better interpreted as a healthy consolidation following a period of robust price movement, rather than worrying about upcoming difficulties. The market is showing a preference for growth-oriented sectors with strong earnings potential. Falling interest rates and lower inflation estimates could further solidify this trend.

Key Points:

  • Economic Resilience: The U.S. economy is robust, with a strong job market and moderating inflation, potentially leading to growth in company earnings and stock prices.
  • Easing Interest Rates: The Federal Reserve might reduce interest rate hikes or start cutting rates if inflation continues to decrease or economy weakens, which could benefit the market.
  • Strong Corporate Earnings: Certain sectors, particularly technology and healthcare,  are expected to continue showing strong earnings growth.

Potential Risks:

  • Geopolitical risks: Conflicts in the Middle East and Red Sea raise concerns, though oil price volatility hasn’t yet significantly impacted the market.
  • Earnings slowdown: High interest rates, rising input costs, and a potential decline in consumer demand could lead to slower or even negative earnings growth for some companies, putting downward pressure on the broader market.

The market is becoming more growth oriented with a focus on sectors like technology and healthcare. With falling interest rates, slowing inflation and strong jobs,  earnings estimates could begin to grow again after a period of lowering estimates.   Investors should use the market pullbacks to continue to build positions in quality growth companies.

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