A good place

The recent midweek inflation report has rejuvenated market sentiment, with a return to risk-on conditions. The current equity risk premium for the S&P 500 versus the 10-year Treasury is at -68 basis points, suggesting that bonds might be more attractive than stocks. However, historical data from 1980-2000 indicates that negative equity risk premiums can still coincide with robust bull markets. Market breadth showed signs of improvement, with 83% of the Russell 3000 advancing post-CPI data, marking the best performance in six months. Despite this, the market has yet to demonstrate sustained momentum, as evidenced by a lack of significant stock highs.

Inflation readings have moderated, with core CPI rising only 0.2% month-over-month, providing relief and reducing the likelihood of imminent rate hikes. Energy prices remain a primary driver of headline inflation, and government spending is suspected to be a factor preventing inflation from returning to 2%. The economic outlook remains positive, with the Atlanta Fed projecting a 3% GDP growth rate for Q4, supported by a balanced labor market and strong consumer health.

The probability of a recession in the next 12 months is estimated at 29%, a relatively low risk. Historical parallels with the mid-1990s suggest that the current economic environment could achieve a soft landing, with stable prices and maximum employment. On the positive side, small business optimism and housing market indicators are at multi-year highs, signaling potential economic strength.

Conversely, retail sales and freight shipments have shown some weakness, indicating potential headwinds. The Empire Manufacturing Index has also declined, although future outlooks remain optimistic. Additionally, AI is anticipated to impact employment, with a significant percentage of CIOs predicting headcount reductions in the near term. Overall, while the economic landscape presents both opportunities and challenges, careful navigation and balanced investment strategies will be essential for financial advisors and portfolio managers.