January 2024 Market Perspective
After a tumultuous year for both stocks and bonds in 2022, investors were not quite sure what 2023 would hold. In short, 2023 did not cease to surprise investors – March saw a banking crisis, continued war between Russia and Ukraine and another war broke out in the Middle East between Israel and Hamas. Coupled with inflation well above the Federal Reserve’s (Fed) 2% goal and interest rates still at their highest level since the financial crisis, last year was set to continue where 2022 left off. The year began with most analysts’ expecting value stocks to continue their dominance over growth as interest rates were continuing to climb and the threat of a potential recession loomed. Almost as if overnight, blue-chip technology stocks took off with a positive outlook for artificial intelligence and its seemingly endless potential across all industries. This acceleration, led by the Magnificent 7 (Mag 7) stocks, continued for the duration of the year. The performance of the Mag 7 did, however, mask poor performance in other areas of the market. Although the S&P 500’s performance was mostly attributed to the Mag 7 for most of the year, we did see a broader market rally in the final two months of the year with small-cap stocks leading the way. The rally that began in November was mostly attributable to the Fed changing its tone regarding interest rates, with Fed Chair Jerome Powell stating, “participants viewed the policy rate as likely at or near its peak for this tightening cycle.” The Fed’s December “dot plot” of individual members’ expectations showed they expect rate cuts, including a possibility of three in 2024, over the next three years to bring rates down to near the long-run range of 2%, according to CNBC. This reversal, paired with a decline in Treasury yields, helped ignite a 9-week rally to end the year. The fourth quarter was the strongest of the year and finished with broader gains than had been seen throughout the year – both the cyclical Dow Jones Industrial Average and the tech-heavy Nasdaq outperformed the S&P.
Equities finished the year on a positive note, thanks to strong fundamental and technical factors. Per Bloomberg Intelligence, the average earnings growth rate for the S&P in the third quarter was 4.48 %, which was notably higher than analysts’ estimates of 1.22% at the beginning of earnings season. These better-than-expected results were widespread, as earnings growth beat expectations in most sectors. As fundamentals drive long-term market performance, a return to solid earnings was a welcome sign to investors. Additionally, all three major indices ended the last two months of the year above their respective 200-day moving averages – a widely monitored technical signal. Prolonged breaks above or below this level can signal that investor sentiment is shifting. This combination of improvedfundamental and technical factors to end 2023 was a positive sign for U.S. equities moving into the new year.
After an abysmal 2022, fixed income markets fluctuated throughout the year but rallied into year’s end. With interest rates dropping, the bellwether 10-year U.S. Treasury yield dropped from 4.37% in November to 3.88% in December. The Bloomberg U.S. Aggregate Bond index finished the month and quarter up 3.83% and 6.82%, respectively. Although the index began the year on shaky ground, a stellar fourth quarter helped the index finish the year up 5.53%.
Recently released inflation data came as a bit of a surprise to investors, with prices for goods and services rising more than expected in December. Following two months of minimal to no monthly gain, December saw the consumer price index (CPI) rise 0.3% and 3.4% year-over-year, compared to analysts’ estimates of 0.2% and 3.2%, respectively. Core CPI, excluding volatile food and energy, increased 0.3% month-over-month and 3.9% year-over-year, virtually in-line with estimates of 0.4% and 3.8%, respectively. Despite the higher-than-expected CPI data, futures traders continue to be bullish on the Fed cutting rates at the conclusion of their March meeting. Currently, the CME FedWatch Tool estimates the probability of a rate cut in March at 69%.
Given the recent volatility in the equity and fixed income markets over the past few years and the potential for short-term uncertainty due to a variety of risks in the markets, a well-diversified portfolio constructed to withstand bouts of market turbulence remains the best path forward for most investors.
