We've just finished the second week of 2024. After nine weeks straight of an up-stock market to end 2023, 2024 has started with some twists and turns. In this past weekend's Barron's, there was the annual Barron's RoundTable discussion with a group of older market sages like Abbey Joseph Cohen and Mario Gabelli, to name just a couple. The discussion begins with the overall tone of the group being one of disappointment with what to expect in 2024. They come to the conclusion that due to the expected economic slowdown and still high interest rates that the expected growth of the overall markets should be anywhere from -5% to +5%. This is clearly less than a robust expectation. They then go on to state that they felt it would be more of a stock pickers' market than an indexing type of market. I will go into some detail about this idea, but I thought I would take a moment and first reflect on what I am seeing under the hood of the markets and therefore what my overall comments for the week should be.
Part of the underlying strength of the US stock market in the end of 2023 was that the markets went from one of a select group of companies pulling the markets higher, to a broader level of participation from the broad indexes of smaller and middle-sized companies joining the advance. I feel that this is super important. Just like a rocket going up in the air, it tends to lose its momentum and eventually stops going higher. In the equity markets, if the market continued to rise with only a small number of companies participating, eventually these companies could get tired, and the markets could then be poised for a pullback. In late 2023, the Small-Cap index (Russell 2000) went from being in a quiet sideways move to all of a sudden strong advance, therefore reflecting a broadening of the number of companies advancing. Is the difference somewhat clear?
2024 has had a different complexion than the last quarter of 2023. This is fairly typical as individuals with gains want to wait to take them to defer taxes to the greatest extent possible, and institutions take this time to rebalance their portfolios, so they are more aligned with the indexes they want to reflect. Since the majority of trading taking place today is computer generated, these trades can take place quite quickly and seem to have, for the most part, exhausted themselves in the first week and a half of trading. In the latter part of last week, the most dependable earnings growers got their footing once again and they put in a solid continuation to their advance. I believe that this is reflective of a Fed that is about done taking "market changing" action and the remaining shock waves of the post-COVID period about done with its supply chain volatility:
- Continued conflict in the Middle East, Ukraine, and Taiwan elections.
- Possible US Government shutdowns due to a lack of party agreement on spending, the Iowa caucus, and political positioning by candidates attempting to gain sponsorship.
- Still unknown bouts of inflationary reporting (last week's CPI report) that could extend the period before the Fed begins lowering interest rates.
On the positive side:
- Because we came within 1% of all-time highs (ATH) in December, we see new highs in January as this was the case 12 of the 12 precedent instances since 1950. That is, after falling 20% and recovering to within 1% of ATH, there has never been a case of a failure. New highs within 20 trading days, or late Jan at worst.
- Even though the above statistic is fairly convincing, a “risk-on” environment of broad market expansion still has yet to be seen. Therefore, it could be a good start in the first quarter, but there should be a separation of leaders from laggards. We have outlined this multiple times, and we think this is largely due to the market’s impatience with the Fed's interest rate cut framework (not clear). I mean this to say that we should remain on a positive tilt but not at the rate we experienced last quarter.
- We are looking at earnings to grow by around 10% in 2024, and more than half of this growth could come from the still early advances from technology advances from AI.
So here we sit after the first two weeks. The same leaders are leading, although some biotech / healthcare has begun heating up. Until we get some guidance out of the Fed and the earnings reports for year-end begin coming in, the markets should remain relatively quiet unless some unknowns present themselves. It appears that the leaders seem to still be benefiting from the cost reductions and margin expansion of AI implementation, industrials continue to show consistency due to spending on improvements in energy production, and retail spending seems to continue as both individual pocketbooks and corporate coffers remain relatively full. Bonds seem to show relative value as rates are still pretty attractive and if the Fed begins lowering short-term rates, long-term rates could follow, and bond prices could advance as opposed to what was experienced for the last three years. Last, is the international area. Mexico seems to be benefitting from the demand for labor far closer than China. Brazil is on the mend and seems to be working through corruption and privatization of businesses, and Southeast Asia continues with a level of consistency in providing manufacturing and stable governments.
This week's note is a bit shorter as there is not a lot of data to digest or new information to consider. Please make sure that you are funding your retirement plans to the greatest of your personal affordability. We are here to assist in suggesting allocation changes to your corporate 401Ks based on your individual goals and objectives.
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