The outlook for the US economy still remains unclear. The questions that worry investors are when and with what force a recession will occur as a consequence of high interest rates. Since mid-October, the major indices have made a strong rise of around 11%, but this growth has not been driven entirely by optimism about the future performance of the economy. The relative performance of the S&P 500 (large-cap stocks) versus the Russell 2000 (small-cap stocks) favors the broad index. Small-cap companies are much more sensitive to the trajectory of the economy and often outperform large-cap companies. Because of this, investor caution is likely to increase in the short term, so we are talking a reverse trend where we have relatively better performance of the S&P 500 versus the Russell 2000.


 

Concerns about the potential growth of the economy over the next year remain as a major accompaniment to the markets. At this time, the continued strength of the economy, a robust labor market and steady consumer spending trends suggest that the Fed's fight against inflation is not over. Concerns about the potential for a recession next year and its magnitude are an important theme, but not the only one. The other question mark is until when the Fed will raise the key interest rate and whether we will see a pause before negative GDP becomes a fact of life for the US economy. There are opinions and consensus about the upper limit of interest rates around 5% or just above 5%. If the assumptions are correct we could see a pause soon. It will definitely give stocks more room to recover some of the losses with more confidence.

Bonds

The bond market also reported satisfactory growth last month as we witnessed yields retreating significantly and relatively quickly from their October peak. The bond market is becoming increasingly attractive to investors as it offers good yields and the potential for future price rises to supplement their gains.

What will drive the market in the week ahead?

This week will provide volatility in the market. Tomorrow - Tuesday - the US inflation data will be published. The forecasts are for lower CPI figures compared to the previous ones. Lower CPI readings than the 7.3%YoY and 0.3%mm forecast will surprise investors in a positive way and it will not be out of the question to see the indices at higher readings than the late November peak.

On Wednesday, the Fed will announce its decision on a further base rate hike and make a statement on forecasts and expectations on economic performance.