According to a nationwide poll released in November, 81% of registered American voters described the condition of the U.S. economy as fair or poor, and only 19% called it good or excellent. This widespread pessimism isn’t warranted by the facts.

But well-informed investors know better. The stock market rally continues, as festive “risk on” bullishness prevails in the run-up to Christmas.

The Federal Reserve is executing the rare feat of a “soft landing” for the economy, which cheers investors. It’s remarkable that inflation has been significantly curbed, without serious damage to the economy. It’s also further confirmation that inflation had less to do with supposed federal overspending (as some partisan pundits persistently proclaim) than it did with COVID-related disruptions.

Let’s examine the latest “Goldilocks” conditions that are keeping stocks afloat. I’ll also explain how you should position your portfolio for the coming new year.

WATCH THIS VIDEO: How to Beat The Investment Crowd in 2024

The November U.S. ADP private payrolls report fell below expectations, further evidence that the Fed will soon conclude its rate-hiking efforts.

ADP reported Wednesday that private payrolls grew by 103,000 workers in November, below the downwardly revised 106,000 in October and the 128,000 consensus estimate.

The ADP report additionally indicated a slowdown in wage gains, with workers experiencing a 5.6% median pay increase annually, the slowest pace since 2021.

Eyes are now on the forthcoming U.S. nonfarm payrolls report for November, due on Friday. The deceleration of the economy is weighing on crude oil prices, despite moves by OPEC+ to restrict production.

The U.S. benchmark West Texas Intermediate (WTI) has dipped to about $70 per barrel, its lowest price since June. Simultaneously, the 10-year U.S. Treasury yield has dropped below 4.2%, significantly lower than recent highs of about 5%. This yield decline has contributed to improved returns in both stock and bond markets.

The gradual cooling of the labor market, coupled with softer wage growth, supports the narrative that the Fed will pause its rate-hiking cycle. The U.S. nonfarm-jobs report for November is anticipated to show a steady unemployment rate of 3.9% and a slight dip in wage growth to 4.0% annually from the previous month’s 4.1%.

Amid signs of an economic slowdown, analysts have lowered S&P 500 corporate earnings per share (EPS) estimates for the fourth quarter, by a larger margin than average. The Q4 bottom-up EPS decreased by 5.0% (to $54.95 from $57.86) from September 30 to November 30. “Bottom-up” is the aggregation of the median EPS estimates for all companies in the index.

And yet, neither earnings nor the economy have gone off a cliff. Analysts expect year-over-year earnings growth of 3.0% for Q4 2023, according to FactSet.

Real gross domestic product (GDP) increased at an annual rate of 5.2% in the third quarter of 2023, according to the “second” estimate released by the Bureau of Economic Analysis.

The technical indicators are positive as well. The S&P 500 hovers above its 50- and 200-day moving averages; the 10-year Treasury yield continues its descent; the New York Stock Exchange Advance/Decline line (NYAD) has been rising; and the CBOE Volatility Index (VIX) has been falling.

The labor market is moderating but the unemployment rate continues to sit at a 50-year low. You’d think more people would be appreciative of an unemployment rate that’s the lowest since Nixon was president.

The current dyspepsia of the electorate reminds me of an old joke. A group of matrons are sitting at a restaurant table, complaining about the food, their husbands, their kids, and their lives in general. The waiter comes by and asks: “Is anything alright?”

Odds favor a pause…

The Federal Reserve isn’t the only monetary game in town. The Bank of Canada (BoC) maintained its 5% interest rate on Wednesday, aligning with expectations amid easing inflation and a softer Canadian economy. The BoC left room for additional rate hikes if inflation resurfaces. European central bankers are making dovish noises as well.

The Fed’s policy-making Federal Open Market Committee (FOMC), during its December 12-13 meeting, is likely to keep the fed funds rate steady at 5.0% – 5.25%, with the option for future hikes. The CME Group’s FedWatch tool puts the odds of the Fed standing pat at 97.3% (see chart).

Source: CME Group

The Fed is expected to emphasize that discussing rate cuts is premature, given inflation remains above the 2.0% target. The current U.S. headline consumer price index (CPI) inflation stands at 3.2%. However, the potential for rate cuts may arise in the latter part of 2024 if inflation continues to moderate and the economy experiences a cooling phase.

Further positive economic data arrived on Thursday, when the Labor Department reported that the number of Americans filing new claims for unemployment benefits increased less than expected last week.

Initial claims for state unemployment benefits rose 1,000 to a seasonally adjusted 220,000 for the week ended December 2. The consensus estimate had been 222,000 claims for the latest week. The labor market continues to slow, but gradually.

The main U.S. stock market indices closed higher on Thursday, as follows:

• DJIA: +0.17%
• S&P 500: +0.80%
• NASDAQ: +1.37%
• Russell 2000: +0.87%

However, a dark cloud on the horizon is China. The world’s second-largest economy is grappling with an imploding property market and massive debt, prompting Moody’s to issue a “negative” rating this week on the country’s bonds.

The global stock and bond markets are poised for an upward trajectory in 2024, but China’s woes are a reminder that risks still lurk around the corner. The Russia-Ukraine and Israel-Hamas wars still wreak carnage and destruction and a “black swan” from overseas isn’t out of the question.

The good news is that defensive assets that underperformed in 2023 are setting the stage for a rebound in 2024.

Specifically, as you recalibrate your portfolio allocations for next year, turn to utilities stocks. The utilities sector has gotten clobbered lately by rising interest rates, but it’s poised to rebound as bond yields continue their descent. That means value plays are ready for the picking.

However, you need to pick the right ones. For our list of the highest-quality utilities stocks, click here now.

John Persinos is the editorial director of Investing Daily.

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