As the “Queen of Funk” Chaka Khan sang in her 1974 hit:

Tell me something good
Tell me, tell me, tell me…

When it comes to the economy, the chronically negative media have consistently told us something bad…even when the news is actually good. Hence the disconnect between the strong economy and the public’s dour mood.

However, economic conditions have become so undeniably positive, the American people are finally catching on. The so-called “vibecession” (i.e., a generally bad vibe about a good economy) is easing.

The University of Michigan reported last Friday that its consumer sentiment index jumped by a remarkable 13% to 69.4, as people became less worried about inflation and more optimistic about the economy and their own personal finances. This latest reading not only ended the downturn but reversed the decline, returning the sentiment index to where it was in August.

An improving “wealth effect” is translating into healthy retail sales for the holiday season. Accordingly, in the final weeks of 2023, stocks are positioned to close near their yearly highs, and bonds are recovering after a challenging three-year period.

The forces behind the solid performance of balanced portfolios this year include a reduction in inflationary pressures, a durable economy that not only sidestepped a recession but also exhibited above-average growth, enthusiasm surrounding artificial intelligence (AI), and a sharp decline in the benchmark 10-year U.S. Treasury note.

Looking ahead to 2024, investors are placing their hopes on a shift in the Federal Reserve’s policy from a restrictive stance to a more neutral position.

The Fed probably will stand pat on rates this week. The betting on The Street is that the Fed will cut rates in mid-2024, although the timing of such a decision may introduce volatility. Nevertheless, the cessation of tightening and the initiation of an easing cycle should act as a catalyst for further advancements in bond prices and a broadening of leadership within the equity market.

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

U.S. and international stocks posted another winning week, with the technology-heavy NASDAQ in the lead:

Here are three reasons why the Fed is on pace to pivot in 2024:

Labor Market Cooling: Last week’s spotlight was on the gently cooling job market, a development welcomed by the Fed. The unemployment rate in November fell to 3.7%, down from 3.9% in October. When 2024 gets underway, I anticipate a more balanced supply and demand for workers, primarily driven by a decrease in job openings rather than a surge in layoffs.

Faster-than-Expected Decline in Inflation: Optimism for a soft landing in the economy is bolstered by a sharp decline in inflation, despite a low unemployment rate. Actual inflation figures for October, particularly the core personal consumption expenditures index (PCE) at 3.5%, suggest a quicker decline than the Fed’s earlier projections. Housing inflation, a major contributor, is expected to recede further, supported by a big drop in price increases for new leases.

Slowing (but Resilient) Economic Growth: Third-quarter annualized U.S. gross domestic product (GDP) rose 5.2%, more than double the economy’s long-term potential, but I don’t anticipate a repetition of this performance in 2024. Excess savings accumulated by households early in the pandemic have provided a buffer against elevated inflation and rising borrowing costs, but signs of consumer fatigue are emerging as savings deplete and credit tightens.

The “just right” economy…

The upshot: “Goldilocks” is back in town. The Fed doesn’t get enough credit by the financial press for pulling off the nearly miraculous feat of curbing inflation without tipping the economy into a recession.

The following chart of the 10-year U.S. Treasury yield (TNX) tells us something very good:

For stock investors, falling bond yields are usually positive, especially for the rate-sensitive housing, utilities, and real estate investment trust (REIT) sectors which rely on low mortgage rates for growth. History tells us that the 10-year yield falls by an average of 0.9% in the six months following the last rate hike of the cycle.

The main U.S. stock market indices closed higher Monday as follows:

• DJIA: +0.43%
• S&P 500: +0.39%
• NASDAQ: +0.20%
• Russell 2000: +0.15%

Monday’s performance marked the third straight positive day for the indices. The S&P 500 and NASDAQ are coming off their sixth consecutive weekly gain, as December’s hot streak continues.

The week ahead…

In the coming days, these scheduled economic reports and events have the power to move markets. Brace yourself for a big week of data:

Consumer price index (Tuesday); producer price index, Federal Open Market Committee (FOMC) decision; initial jobless claims, U.S. retail sales (Thursday); U.S. industrial production (Friday).

While a tug of war between market pricing and Fed messaging may introduce volatility, I anticipate both forces moving in the same direction in the coming year. A soft patch in economic growth could prompt the Fed to cut rates in the latter half of 2024, supporting a return to target inflation and leading to further decreases in the 10-year Treasury yield.

This shift in Fed policy should act as a catalyst for market laggards to catch up, presenting opportunities beyond the dominant tech stocks. As you navigate the twists and turns of 2024, cautious optimism should be your stance, grounded in the likelihood of peaked interest rates, the Fed’s imminent initiation of rate cuts, moderating inflation, and reasonable valuations in areas of the market that have yet to experience significant gains.

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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