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The market continues to trade in a strong upward channel, but we think it is currently overbought and a pullback will most likely occur. This should be considered a buying opportunity, as we see the market moving higher throughout the year. Energy has been moving higher with the instability in the Middle East and has the potential to keep inflation from dropping, as all hope it will.

In Q4, U.S. economic growth exceeded previous estimates, with real GDP rising to a 3.4% annualized rate. Upward revisions to consumer spending, business investment, and government spending were partly offset by decreases in inventories and net exports. Real final sales to domestic purchasers, excluding inventories and net exports, increased to a 3.5% annualized rate, indicating robust domestic demand. This trend suggests continued growth in the near term, supported by a drop in our recession probability model. Fiscal stimulus exceeding $5 trillion during the pandemic, alongside ongoing government support, has kept the economy expanding, driving inflation. Despite the Fed raising rates in March 2022 to counter inflation, the economy grew beyond potential in the second half of 2023. With inflation persisting above 2%, there’s concern that any Fed easing could risk overheating the economy, especially as fiscal policies like the Infrastructure Investment and Jobs Act continue to support growth. While supportive for equity markets historically, such policies may exacerbate inflation if they push growth beyond capacity.

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.4 percent in February on a seasonally adjusted basis, after rising 0.3 percent in January, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 3.2 percent before seasonal adjustment.

The index for shelter rose in February, as did the index for gasoline. Combined, these two indexes contributed over sixty percent of the monthly increase in the index for all items. The energy index rose 2.3 percent over the month, as all of its component indexes increased. The food index was unchanged in February, as was the food at home index. The food away from home index rose 0.1 percent over the month.

The index for all items less food and energy rose 0.4 percent in February, as it did in January. Indexes which increased in February include shelter, airline fares, motor vehicle insurance, apparel, and recreation. The index for personal care and the index for household furnishings and operations were among those that decreased over the month.

The all items index rose 3.2 percent for the 12 months ending February, a larger increase than the 3.1-percent increase for the 12 months ending January. The all items less food and energy index rose 3.8 percent over the last 12 months. The energy index decreased 1.9 percent for the 12 months ending February, while the food index increased 2.2 percent over the last year.