January 2024: Solid start, weak finish for equities
January 2024 at a glance
After a start to the new year that looked like a continuation of 2023, markets delivered mixed results by month-end. Fed Chairman Powell disappointed investors by suggesting that interest rate cuts would not likely occur at the March meeting as markets had increasingly expected.1 Underlying the Fed’s January posture was continued economic strength and slowing in the pace of declines in inflation.
- Equity markets posted gains in all but the small cap segment. International stocks led the way in January after lagging during most of last year. The major US large cap indices eked out small gains after a sharp drop on the last day of the month on “higher for longer” interest rate fears.
- The Fed left policy rates unchanged at their January meeting, but longer term rates generally rose during the month.
- The “soft landing” (or “no landing”) scenario for the economy continued to play out with strong GDP growth (+3.3% in Q4), tight labor markets (216K jobs added in December) and consumer spending (up 0.6% in December and 5.6% for the year).2 3 4 Inflation ticked up a bit in December from November (Personal Consumption Expenditures index +0.2% after averaging no change in the prior two months), increasing concern that gains on inflation may have moderated.5
The path of markets in the near-term will depend on the balance of economic growth and inflation and the resulting changes in interest rate policy. Investors are expecting continued moderation in inflation that would allow the Fed to ease off on the tight monetary policy but without any substantial slowing in the economy. It’s a delicate balance, but not out of the question.
Solid start, weak finish for equities
Equity markets were mixed to start the year, with a mild reversal in leadership from last quarter.6
- International equities, both developed and international, were the strongest performers in January after posting the weakest performance in the fourth quarter.7
- The S&P 500, Dow Jones Industrials and NASDAQ Composite indices fell sharply on the last day of the month, but still delivered positive returns in January, up 1.68%, 1.31% and 1.02%, respectively.8
- US Small cap stocks reversed course from a strong Q4 and posted negative returns in January on profit taking and still high economic uncertainty.9
Sector leadership continued familiar patterns in January:10
- Communications Services and Technology stocks increased the most in January, up 4.84% and 3.91%, respectively.
- Cyclical stocks fared the worst, with utilities, materials, consumer discretionary and real estate all down more than 3% for the month.
- Energy stocks continued to suffer declines, falling slightly in January.
International stocks, both in developed and emerging markets, outperformed US markets for the month.
Source: S&P Dow Jones Indices11, NASDAQ12
“Higher for longer” rate concerns dampens bonds
The Fed continued to hold short-term policy rates unchanged in January, but longer-term rates rose steadily during the month after falling sharply in November and December, causing fixed income returns to weaken.
- The 10-year treasury yield rose 30bp to 4.18% on January 24, up 30bp from year-end before falling in the last week of the month to end at 3.99%.13
- Core fixed income segments had negative returns in January after a strong rally in Q4.14
- More equity-like preferred stocks and high yield bonds continued their marked leadership.15
- Shorter-duration fixed income posted slight gains.16
- Non-US bonds fell the most in January, after rallying in the final quarter last year.17
Source: S&P, JP Morgan
Continued growth, but high uncertainty
Contrary to what most economic models predicted in the face of much tighter monetary policy in the past year and a half, the US economy continues to show solid growth. Preliminary estimates of GDP growth in last year’s fourth quarter came in +3.3% driven by strong consumer spending.18 Labor markets remain tight with 216K jobs added in December and the unemployment rate holding steady at 3.7%.19 Consumer spending continued to provide support, rising solidly in December from prior months and up 5.6% for the year despite declining savings and increased credit use.20 There are uncertainties to be sure, but as Fed Chair Powell said in his press conference on January 31, “Let's be honest, this is a good economy.” 21
One of the forecasting tools for gauging recession risks is the Conference Board’s index of leading economic indicators. Specifically, the rolling 6-month growth rate of the index is often used as a recession signal when that growth rate falls below -4.4%.22 The chart shows that the 2000 and 2008 (and the 2020 brief pandemic era) recessions aligned with the indicator breaching this level. The signal hit a recession warning in early 2022, but so far no recession has occurred. The index itself continues to fall, but the rate of the decline over the rolling 6 month windows has moderated and has started to climb back from its low. It is also helpful to look at the underlying components of the index. In December, six out of ten leading indicators made positive contributions but were offset by weak conditions in manufacturing, the high interest-rate environment, and low consumer confidence. The Conference Board, sticking to their index signal, still expects a mild recession in Q2 or Q3.23
US Leading Economic Indicators: Rolling 6-Month Growth Rate
Like a lot of the information that investors are digesting in the current environment, there are potential cracks below a relatively solid surface. Employment has remained strong, but increasing layoff news and the industry mix of job gains cause some concerns that the job market may worsen. Consumers have continued to fuel growth, but is the current rate of spending sustainable as savings are drawn down? And, the primary issue, inflation has moderated from highs of 2022 and early 2023, but remains well above the level the Fed would like. The fear is that persistent inflation will keep the Fed from lowering interest rates to put monetary policy in a more neutral stance. That fear showed itself on the last day of January when Chair Powell indicated that a rate cut in March is unlikely. Equity markets fell sharply on the day showing the interest rate sensitivity currently priced into markets.25 Expectations are high that the Fed will be able to achieve a balance of growth, inflation and interest rates, but worries that they won’t are equally high.