Despite April Stumble, Positive Stock-Market Outlook for 2024

According to the advance estimate released today by the Bureau of Economic Analysis, U.S. Gross Domestic Product expanded in the first quarter at an annualized rate of 1.6%. That's well below the 2.5% consensus and 3.4% growth in the fourth quarter. Personal consumption expenditures were up 2.5%, but that number may not be as solid as it appears. The consumer category was carried by the huge services category, which was up 4.0%. Consumer spending on goods declined 0.4%, which may worry the Fed. Within goods, nondurable goods were flat but durables were down 1.2%. We believe weakness in big-ticket categories such as furniture and household equipment is a sign that many consumers are feeling the weight of still-high food prices and record credit-card rates. Within this context, it may seem surprising that residential fixed investment (housing) was up 13.9%. We believe the answer is that the big Millennial generation is coming of age and forming households. With the inventory of existing homes constrained as owners are locked in with low mortgage rates, prospective buyers are turning to the new-home market. The GDP report also contains data on inflation, which, consistent with recent reports, came in hotter than we hoped. The PCE Price Index increased 3.4% in the first quarter, compared with an increase of 1.8% in the fourth quarter. Excluding food and energy, the index increased 3.7%, compared with an increase of 2.0% in the previous quarter. In our view, the report this morning indicates that many consumers are feeling the weight of inflation that is lingering the after Fed's 11 rate hikes. After the report, futures on the S&P 500 fell. The yield on the 10-year Treasury note rose, probably on the inflation numbers. Based on futures trading, there was little change in the expectation that the Fed will maintain its 5.25%-5.5% policy target at its meetings in May and June. Futures continued to show that the chance of a rate cut in September is slightly better than 50%.