Stocks started the year with a modest pullback, then rebounded in the second half of the month before retreating on the last trading day following the Fed’s interest rates decision. The S&P 500 and the Dow advanced 1.7% and 1.3%, respectively, while the technology-heavy Nasdaq underperformed by returning 1.0% for the month. 

Stocks continued their winning streak in December on lower-than-expected inflation data, market expectation of interest rate cuts early in 2024, and optimism that the U.S. economy will be able to avoid a recession. The S&P 500 and the Dow advanced 4.5% and 4.9%, respectively, while the technology-heavy Nasdaq rallied 5.6% for the month. The recent runup in equity prices is primarily due to expectations of earlier interest rate cuts, rather than a significant improvement in corporate earnings expectations.

Stocks rallied in November on slower-than-expected inflation data, falling Treasury yields, and speculation that the Fed will be able to pull off a soft landing. The S&P 500 and the Dow advanced 9.1% and 9.2%, respectively, while the technology-heavy Nasdaq rallied 10.8% for the month. Markets seemed to take the month’s data as an indication that the Fed will likely cut rates aggressively soon (a full percentage point cut by the end of next year is currently forecasted by the futures market). However, we do not expect rate cuts until the second half of 2024.