2024 January Market Update
Equity markets experienced a mixed January, with split performance amongst major market indices. The larger-company focused S&P 500 and Dow Jones Industrial Average both finished slightly higher, while the smaller-company focused Russell 2000 took a step back to start the year. Two of the “Magnificent Seven” stocks finished lower on the month, but the group still re-established outperformance over the other 493 stocks in the S&P 500. This has partially reversed the broadening trend that lifted the “average” stock in November and December, with the market returning to the historically narrow leadership seen for much of last year. Health Care and Financials, laggard sectors in 2023, joined some of the large-cap Technology and AI-related Semiconductor names on the list of outperformers.
Fourth Quarter earnings reporting season is now fully underway, with many companies also issuing guidance for 2024. In aggregate, companies continue to report better than expected results and guidance mostly in-line with forward expectations. However, the tepid broad market response to these reports demonstrates how much optimism was already priced into equities. Many companies received the “sell the news” treatment, as their stock has traded down despite meeting or exceeding earnings expectations. Shrugging off the mixed reaction to earnings and downward revisions of earnings estimates from previously over-optimistic levels, the S&P 500 still managed to trade to a new all-time high in January.
While we certainly advocate caution anytime consensus expectations are moving contrary to the direction of markets, investors should not necessarily fear investing at all-time highs. With respect to stocks, “what goes up, does not have to come down.” Today, the S&P 500 index merely trades at the same level it traded at entering 2022. Markets have had over two years to digest supply shocks, inflation, geopolitical conflicts, the most aggressive rate tightening cycle seen in modern history, and persistent debates about soft and hard landings. Meanwhile, fundamentals have quietly improved and aggregate S&P 500 earnings for 2024 are currently estimated to be 12% higher than reported in 2022. Valuations at the company level have diverged significantly over the past two years, creating compelling opportunities for value-oriented investors. For example, the average dividend stock (with dividend yields over 2%) entered January trading at only a 14.5x forward Price-to-Earnings ratio, significantly cheaper than we saw two years ago. Meanwhile, divergence between resilient operators and weaker performers, even between direct competitors, has led to notable variations in equity performance this earnings season. A deeper dive beyond broad market trends shows just how much opportunity remains for those who can successfully identify superior operators trading at reasonable prices.
Macroeconomic conditions also remain conducive to higher stock and bond prices, supporting the “soft landing” narrative. Consumers spending remains strong and inflation appears to have definitively peaked for this cycle. The tightening of credit spreads in the bond market reflects the equally impressive resiliency of corporate balance sheet health. The most bullish investors are also anticipating further support from fiscal stimulus as the year goes on. Both a new bipartisan Tax Bill and rumored further stimulative government policies (as is commonly seen in election years) could provide tailwinds to equity markets. Meanwhile fixed income markets stand to benefit from any future move by the Fed to cut rates alongside continued actions by the Treasury to “loosen” the money supply and increase liquidity.
We would not be surprised to see the potential transition from constrictive to accommodative policies lead to increased volatility. There is often quite a lag between policy implementation and the manifestation of its effects on the economy. We are still well within the “average” timeframe for an economic slowdown following a tightening cycle, and recent data related to employment, manufacturing, and consumer credit do suggest some cooling. The immediate market response to incrementally more hawkish Fed commentary (released on the 31st) shows markets still fear that the Fed may wait too long to ease conditions. As policy changes are not clean-cut processes, we would not expect directly correlated market responses, nor can we quantify exactly how much future expectations are already discounted in asset prices. Instead, we continue to highlight the opportunity for long-term investors to take advantage of these short-term ebbs and flows to position for future success.
The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of the Wise Investor Group and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Investments mentioned may not be suitable for all investors. The companies engaged in the communications and technology industries are subject to fierce competition and their products and services may be subject to rapid obsolescence. Bond prices and yields are subject to change based upon market conditions and availability. If bonds are sold prior to maturity, you may receive more or less than your initial investment. Holding bonds to term allows redemption at par value. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices generally rise. There are special risks associated with investing with bonds such as interest rate risk, market risk, call risk, prepayment risk, credit risk, reinvestment risk, and unique tax consequences. To learn more about these risks and the suitability of these bonds for you, please contact our office. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.
