The first month of 2024 ended up being more of the same from last year. In January, the Fed kept rates unchanged, the Jobs reports and the labor market remained very strong, and the consumer continued to carry this economy. For us, the big news was 4th qtr GDP came in at +3.3%, and 2.5% annualized for 2023. Not bad for an economy that was supposed to be recession. (We were surprised to see that headline not get more attention).
We are in earnings season right now, and while the majority of companies that have reported have beat expectations, they’ve beat by less than they normally have. So far, tech has continued to dominate, with names like Amazon, Microsoft, & Meta completely blowing past expectations.
Span out though and this market does feel like it’s looking to catch its breath after a stellar year-end rally. All 3 major indexes posted slight gains for the month (more on that later) but small caps pulled back sharply while international markets and bonds both declined for the month. Once again, the S&P Equal Weight index is in negative territory for the year thus far. I find it hard to believe 2024 will mirror 2023 this closely but right now it feels like déjà vu.
Here are the YTD numbers:
Brokered CD Rates
“So goes January, so goes the year”. Have you ever heard that before? We don’t blame you if you haven’t; it’s not catchy at all. It is, however, statistically great news:
Going back to 1929, if January was a positive month for the markets, then the rest of the year was up 79% of the time.
This January was a good one with the S&P finally reaching a new all-time high on January 19th. That put an end to what had become the 6th longest streak without a new high. (The previous high was over 2 years ago!) For those keeping score, so far, the Dow and S&P have created new highs, but the NASDAQ still remains 3% off its all time high.
There are 3 points-of-interest from this:
Small Caps are still in a bear market. According to Goldman Sachs, whenever the S&P 500 hits an all-time high while small caps are still in a bear market, that has historically proven to be a positive signal for both indexes but even more so for the small caps. Given that small caps have lagged so dramatically for so long, that would be a welcome, long overdue change. But make no mistake, large cap stocks still dominate for now.
We were encouraged to see the market gains of the 4th quarter last year broaden out to include other areas besides just the 7 big-tech names, unfortunately January not only reversed that trend but narrowed the concentration even more. For the month of January, 80% of the returns came from only 3 companies: Nvidia, Microsoft, & Meta (Facebook). We really need this growth to broaden out. Serious investors simply can’t chase tech names, let alone only a handful of tech names. (We do have to give honorable mention to the Healthcare stocks though; they finally saw some gains in January.)
While headlines, hype, or fear can drive stock prices in the short term, in the long run it’s all about earnings. According to a recent Wall Street Journal report, if you exclude Tesla, the Magnificent Seven Six are projected to report a 62.8% jump in earnings for the fourth quarter. That’s truly incredible and deservedly why they get a lot of attention. However, the other 494 companies in the S&P 500 are expected to post an -8.6% decline in earnings. Added together, that’s a total combined earnings growth of 1.6% for the entire S&P 500. That’s not very impressive. To put it another way, even though this market continues to climb to new highs, it’s carried on the back of only a few names. We’ve been highlighting this for over a year now and I’d really hoped we’d have a different narrative by now.
Ultimately none of these changes the direction for us as the overall trends remain positive. The economy is doing better than most expected, inflation continues to come down, the Fed will most likely lower rates at some point this year, and historically, the odds lean in the favor that markets should post positive returns this year. And most importantly, at some point the markets will broaden out; after all, there’s an old saying “A rising tide lifts all boats…not just the tech ones.” Or something like that.
The big football game is this Sunday. John is picking San Francisco and Vegas odds agree with him at the moment. I don’t follow either team but if I had to pick one then I’d judge it based on how I make most tough decisions in life: who has the better BBQ. Kansas City* is famous for their thick BBQ sauce. I’ve never even heard of San Francisco BBQ and there’s probably a reason for that. In this case it’s an easy call: Kansas City.
*Note: While KC is technically on the Missouri state side, we’re splitting hairs here. As any good Midwesterner can tell you, the state of Kansas claims them just as much as Missouri does.
In next month’s commentary, we’ll put some perspective around the markets during election years as we’re already starting to get those questions from many of you.
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