January Market Update from IFA

Week 1

The stock market registered losses following nine-straight weeks of gains to close out 2023. Profit-taking activity in the mega cap stocks, and other stocks that outperformed last year, contributed to the downbeat price action. 

The only three S&P 500 sectors to register a decline in 2023 saw some of the largest gains this week. The utilities sector, which fell 10.2% last year, logged a 1.8% gain this week. The energy sector, which declined 4.8% in 2023, climbed 1.1% this week. The consumer staples sector, which fell 2.2% last year, closed with a 0.03% gain this week. 

Meanwhile, the heavily-weighted information technology (-4.1%) and consumer discretionary (-3.5%) sectors saw the largest declines after outperforming last year.

In addition to profit-taking activity, rising market rates also contributed to the negative bias this week after the 10-yr yield passed 4.00%. The 10-yr note yield climbed 16 basis points to 4.04% and the 2-yr note yield rose 14 basis points to 4.39%.

The probability of a 25-basis points rate cut to 5.00-5.25% at the March FOMC meeting is 68.3% versus 88.5% last week.

Employers hired at a solid pace in December, capping a year of steady gains for a job market that continues to defy expectations and remains a bright spot in a gradually cooling economy.

Wages rose a healthy 4.1% last month from a year earlier and the unemployment rate in December held at 3.7%. The jobless rate began 2023 at 3.4%, matching lows not seen since the late 1960s, and remains low despite inching higher late last year.

Many economists have lowered their estimates of the probability the economy will see a recession, however, given the resilience in the labor market and among consumers. 

Stocks are off to a bumpy start in the early days of 2024. Proponents of the January Barometer are hoping for a turnaround because they believe the market’s performance in the first month of the year sets the tone for the rest.

The S&P 500 averages a 1.2% gain in January and rallies more than 60% of the time, according to Dow Jones Market Data going back to 1928. The Nasdaq Composite has delivered its best returns in January, posting an average gain of 2.5% and rallying 65% of the time. 

When the S&P 500 rises in the first month of the year, its average return for the remainder is 9.2%, and its return is positive 78% of the time. When it drops in January, the average return for the rest of the year falls to 2.1%, and the remaining months are positive 58% of the time. 

Week 2

The stock market closed higher, which marks its tenth week of gains in 11 weeks. The S&P 500, which briefly traded above its all-time high close on Friday, recovered all of last week's losses, leaving the index up 0.3% for the year.

The best performing S&P 500 sectors all house mega cap constituents. The information technology (+4.9%), communication services (+3.4%), and consumer discretionary (+1.5%) sectors saw the largest gains on the week. Meanwhile, the energy sector logged the steepest decline (-2.4%).

This week's economic data painted a somewhat mixed picture. The Consumer Price Index (CPI) report for December was slightly hotter than the market's hopeful expectations and weekly initial jobless claims remain below recession-like levels. Meanwhile, the Producer Price Index was cooler than expected. 

Week 3

This abbreviated week closed on a strong note. The S&P 500 is sitting at a fresh record high (4,839.81) and is up 1.5% for the year. The Nasdaq Composite is up 2.0% for the year thanks to this week's gain and the Dow Jones Industrial Average is up 0.5%.

Five of the 11 S&P 500 sectors registered gains this week. The heavily-weighted information technology sector was the top gainer by a wide margin, jumping 4.3% thanks to the strength in NVDA and its other mega cap components. Meanwhile, the rate-sensitive utilities (-3.7%) and real estate (-2.1%) sectors saw some of the largest declines.

Consumer sentiment surged 29% since November, the biggest two-month increase since 1991, the University of Michigan said Friday, adding to gauges showing improving moods. 

A better mood among Americans is good for growth since happier consumers are, on balance, likely to keep spending—and that consumption drives around two-thirds of the U.S. economy. 

Unemployment is historically low, and hiring is still strong. What has changed is that inflation is cooling rapidly, while mortgage rates are down sharply from last year and the S&P 500 rose to a record high Friday.

While economists expect the U.S. to dodge a recession in 2024, they see growth slowing sharply as the full impact of the Fed’s interest-rate increases strain the finances of households and businesses.

Bull markets on average last more than 1,700 days, or longer than four years, the data shows. The median length of a bull run is just north of 1,500 days.

Week 4

The broadening out of buying activity left eight of the 11 S&P 500 sectors higher this week. The energy sector saw the largest gain, jumping 5.2%, followed by the communication services sector, which gained 4.5%. The three laggards to log a decline were consumer discretionary (-1.4%), real estate (-0.5%), and health care (-0.2%).

Core prices, which exclude volatile food and energy costs, rose 2.9% on the year, the smallest year-over-year increase since March 2021. Using three- and six-month annualized rates, core inflation was 1.5% and 1.9%, respectively, in December.

Officials last raised rates in July, when they lifted their benchmark rate to a range between 5.25% and 5.5%, a more than two-decade high. Fed officials penciled in three rate cuts this year in projections at their last meeting in December.

Now, with the inflation rate cooling markets largely expect the Fed to start unwinding its policy tightening. As of Friday morning, futures traders were assigning about a 53% chance the Fed will enact its first rate cut this cycle in March, according to CME Group.

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