January Market Update

January Market Update

As 2024 begins, I’m going to be posting regular Market Updates. So much has changed in the “Markets” over the last couple of years. For anyone in the Investment Management business, the four most avoided words are: This Time is Different. While I am in the Investment Management business, I’m pretty sure this time is different, for a lot of important reasons.

So, over the next several months, I’ll be posting some of the highlights from my research and sharing my thoughts about the markets, what’s impacting markets, and most importantly what we should do about it moving forward. Spoiler alert – my favorite villain in the story is “The Fed” which is and always has been just a little political, especially in Presidential Election Years.

Major U.S. equity indexes closed out 2023 strongly in the green, marking the second consecutive month of gains for the S&P 500.

Financial Planning is Key

While Investment Planning and Investment Management are really important topics, Financial Planning is more likely to move the needle on our financial lives. Many of us tend to spend more during the holidays—I know I do, given the expenses associated with this season. But with 2024 underway, now is the perfect time to reset and focus on getting your financial goals in motion.

Here are a few tips to get you started:

• Set clear financial goals – Define your financial objectives for 2024. Whether it’s building an emergency fund, paying off debt, or investing for the future, setting specific, achievable goals is a great place to start.

• Assess your 2023 spending – Even though it may not be that enjoyable, begin by reviewing your holiday spending to understand your current financial situation. Then, take a look at your spending over the course of 2023. This evaluation will provide valuable insights into your spending patterns.

• Create a budget – Develop a realistic budget that reflects your income and expenses for the new year. Consider using a budgeting app, like You Need a Budget (YNAB), that connects right to your bank accounts to track your budget. These tools can also do the work of analyzing yearly spending patterns for you.

If you have any questions or want to discuss specific investment opportunities, please don’t hesitate to reach out. I’m always happy to be a resource for you. Click here to book a Zoom Meeting or Phone call.

Major Stock Indexes

For the month of December, the S&P 500 increased by 4.42%, the Nasdaq 100 reached an all-time monthly closing high by adding 5.51%–and the Dow Jones Industrial Average rose by 4.84%–also an all-time monthly closing high.

S&P 500: 9 Weeks in a Row

The S&P 500 has enjoyed green on the screen for nine consecutive weeks. It closed December just 0.6%.shy of its all-time high, set in January 2022.

The lopsided performance with the “Mag 7” names leading the way has market watchers curious about the relative performance of the remaining index components of the S&P 500 heading into the new year. The rise of AI has fueled the gains in these select names, with 2024 being discussed as the year of AI implementation.

Roaring Bonds

Bond markets pulled off their biggest two-month rally in decades. Well-deserved for long-term investors, with bonds enduring a prolonged bear market in light of rising interest rates.

Rate cut optimism helped to fuel the bond rally as investors weigh the increasingly dovish expectations of the Fed in 2024.

Small-Caps Gain

Small-cap stocks, as measured by the Russell 2000 Index, have come to life in a big way in the last two months, gaining ground on their large-cap counterparts after failing to participate in broad stock market rallies for much of the year.

Attractive valuations have investors chatting about the smaller market capitalization stocks, even as the Russell 2000 returned 12.05% in December.

Payrolls

December’s jobs report (November data) showed a positive trend. The Nonfarm Payroll data for November indicated a gain of 199,000 jobs, which exceeded the estimated 190,000 and the previous month’s gain of 150,000. The result is a “just right” scenario, or what some describe as a “Goldilocks” scenario. The healthcare and government sectors have created many of these new employment opportunities.

The labor market picture shows signs of the economy experiencing a soft landing, which is good news. This can mean that the economy is cooling down but not heading towards a full-blown recession. The markets also reacted favorably to the jobs report, as the results were very close to expectations, resulting in less volatility.

In addition, the U.S. unemployment rate dropped to 3.7%, lower than the expected 3.9%. Overall, the labor market continues to impress, with an increase in the labor force participation rate and a decrease in unemployment.

Fed Pivot & Rate Cut Expectations

In December, the Federal Reserve held its December policy meeting and left benchmark interest rates unchanged at 5.25% – 5.50% for the third consecutive time, which was in line with market expectations. That said, the Fed indicated that it’s more likely to shift towards a more accommodating monetary policy stance soon, which could include rate cuts.

Fed members projected the possibility of three 25-basis point rate cuts in 2024. This move towards a more dovish policy was well-received by the markets, as major U.S. stock indexes rose and treasury yields fell.

Markets Versus Fed

According to the CME FedWatch Tool, there is a 73.5% implied chance of a 25 basis point cut in March 2024. That said, there are some disparities to be aware of.

With the Fed broadcasting a message of 3 rate cuts in 2024, current market pricing and expectations show the equivalent of 6 to 7 quarter-point rate cuts.

Historically, rate cuts have been utilized by the Fed as stimulus during periods of economic contraction. Looking at the major stock market indexes, there are no signs of cooling–at least not at the end of December. Wall Street and Main Street are two different things, however.

The Takeaway

December featured a bullish continuation from November’s rally across major market indexes.

As January begins, the feeling across markets is easygoing at the time of writing. Markets could be overdue for some time of pullback after this recent runup, which could create opportunities for investors with cash on the sidelines.

Helpful Indicators

The following “Economic Indicators” offer some insight into different aspects of the financial markets, investor sentiment, economic conditions, and government finances.

Speaking of Government, there are a couple of “Indicators” that are not on the list below but they’re definitely going to drive the markets in 2024…

• Presidential Election – Charts Coming Soon

• The January Effect – Here’s a great article from Investopedia

Yield Curve:

• Description: The Yield Curve is a graphical representation of interest rates on government bonds of different maturities. It provides insights into the expectations of market participants regarding future economic conditions.

• Link: Yield Curve

• Link: Yield Curve on April 15, 2003 (this is a normal Yield Curve)

• Link: Yield Curve on January 3, 2024 (This is an INVERTED Yield Curve)

Fear and Greed Index:

• Description: The Fear and Greed Index is a sentiment indicator that assesses the prevailing mood of investors in the stock market. It helps gauge whether investors are driven by fear (bearish) or greed (bullish).

• Link: Fear and Greed Index

VIX (CBOE Volatility Index):

• Description: The VIX, also known as the “Fear Gauge,” measures market volatility and investor sentiment. It reflects the market’s expectations for future volatility and can be used as a gauge of market risk.

• Link: VIX (CBOE Volatility Index)

US Debt Clock:

• Description: The US Debt Clock is an interactive real-time display of various financial and economic statistics related to the United States. It provides up-to-the-minute data on national debt, spending, taxation, and more.

• Link: US Debt Clock

Top 15 Economic Indicators

These 15 Economic Indicatorsare useful tools for making informed investment decisions.

1. Consumer Confidence Index:

   • Description: This indicator reflects consumer sentiment and can have an immediate impact on consumer spending, affecting the stock market in the short term.

   • Link: Consumer Confidence Index

2. Federal Funds Rate:

   • Description: Changes in the Federal Funds Rate can influence borrowing costs and corporate profitability, making it highly relevant to short-term stock market movements.

   • Link: Federal Funds Rate

3. Currency Exchange Rates:

   • Description: Exchange rate fluctuations can impact multinational corporations’ earnings and competitiveness, directly affecting short-term stock prices.

   • Link: Currency Exchange Rates

4. Commodity Prices (e.g., Oil, Gold):

   • Description: Commodity price changes can influence inflation expectations, which in turn affect stock market movements, especially for sectors like energy and materials.

   • Link: Commodity Prices

5. Treasury Bond Yields:

   • Description: Bond yields provide insights into interest rate expectations and can influence short-term stock market sentiment, particularly for income-oriented investors.

   • Link: Treasury Bond Yields

6. Durable Goods Orders:

   • Description: This indicator can reveal trends in business investment and consumer spending, impacting short-term stock performance, especially for industrial and manufacturing sectors.

   • Link: Durable Goods Orders

7. Retail Sales:

   • Description: Retail sales data can provide a snapshot of consumer spending trends, affecting short-term stock prices for retail and consumer goods companies.

   • Link: Retail Sales

8. Industrial Production:

   • Description: Changes in industrial production can signal economic health and impact short-term stock movements, particularly for manufacturing-related sectors.

   • Link: Industrial Production

9. Producer Price Index (PPI):

   • Description: PPI data can indicate inflationary pressures, which can affect short-term stock market sentiment and pricing.

   • Link: Producer Price Index (PPI)

10. Trade Balance (Imports and Exports):

    • Description: Trade balance data can impact short-term stock prices, particularly for companies heavily reliant on international trade.

    • Link: Trade Balance (Imports and Exports)

11. Housing Market – Home Prices and Sales:

    • Description: While housing data can influence consumer sentiment, its direct impact on short-term stock market movements may be somewhat limited.

    • Link: Housing Market – Home Prices and Sales

12. Gross Domestic Product (GDP):

    • Description: GDP data, while important for long-term economic health, may have less immediate impact on short-term stock prices.

    • Link: Gross Domestic Product (GDP)

13. Consumer Price Index (CPI):

    • Description: CPI data is crucial for understanding inflation trends, but its direct impact on short-term stock market movements can be more muted.

    • Link: Consumer Price Index (CPI)

14. Unemployment Rate:

    • Description: The unemployment rate is vital for assessing the labor market, but its direct connection to short-term stock market movements can be complex and delayed.

    • Link: Unemployment Rate

15. Economic Calendar (Upcoming Economic Events and Releases):

    • Description: While an economic calendar is essential for planning, the release of economic data itself may not always have an immediate impact on short-term stock prices.

    • Link: Economic Calendar

These descriptions and links provide you with easy access to the respective economic indicators for monitoring their updates and potential impact on short-term stock market movements.