The Month At-A-Glance
- The calendar year changed, but momentum for U.S. large-cap growth stocks continued into January.
- Developed international markets posted a modest gain despite a strengthening U.S. dollar.
- Emerging-market equities fell during January as concerns about China’s economy intensified.
- The U.S. Federal Reserve held rates at current levels, and Chairman Powell pushed back on the idea of rate cuts as soon as March.
After an extraordinary last two months of 2023 for U.S. small-cap stocks, leadership was handed back to their larger brethren. The S&P 500 returned a modest 1.7%, while the Russell 2000 Index dropped 3.9% in January. The larger, growthier areas of the U.S. market outperformed the smaller, value segments. Sound familiar?
The S&P 500 hit a new high in January after nearly two years. After hitting 4,797 at the start of January 2022, the S&P 500 saw a price decline of 25%, which then took roughly 15 months to recover. The S&P 500 finally hit a new high on January 19th reaching 4,840. From the start of 2022 through January 2024, the S&P 500 has a cumulative return of 5.2% (including dividends). And while it may seem like it’s been a market dominated by growth stocks, that was not the case over the trailing two years. Large-cap growth and value stocks have about the same cumulative return since the start of 2022. Value stocks held up relatively better during 2022, and it took a strong rally in 2023 for growth stocks to end up at the same level as value stocks.
Developed international stocks underperformed with a return of 0.6% in dollar terms. Emerging-market stocks were the laggard during the month, with a drop of 4.6%. Chinese equities (MSCI China) were the main detractor in January (loss of over 10%). Chinese stocks had a burst of hope from November 2022 to March 2023, during which they soared 53% on the back of their economy reopening. However, since then, the recovery has been below expectations, and equity markets have been unable to get off the mat. MSCI China is about 60% off its February 2021 peak.
Interest rates inched higher during January, with the benchmark 10-year U.S. Treasury going from 3.88% to 3.99%. The Bloomberg U.S. Aggregate Bond Index fell 0.3% in the month. More credit-oriented sectors fared better, with U.S. corporate bonds and high-yield bonds eking out small gains.
As expected, the Federal Open Market Committee (FOMC) left the fed funds target range at 5.25%-5.5% at their January meeting. In their statement, the FOMC removed their tightening bias, deciding to cut the verbiage that said, “the extent any additional policy firming that may be appropriate.” Despite this, Chair Powell pushed back on the market’s expectation of a rate cut in March. He said a March cut was not their base case and that it was unlikely that the FOMC would have the confidence to move rates lower by March. The market is now putting roughly 50/50 odds that rates will be lower at the May Fed meeting (as of 2/5/2024). This delay in the Fed’s first rate cut comes after the market had ascribed nearly 90% odds earlier this year that the fed funds rate would be lower by March (see chart below). It currently stands at an 84% probability that March rates stay the same.
The strength of the economy is allowing the Fed to approach any interest rate cuts with caution. The fourth quarter 2023 GDP release showed the economy growing at 3.3% (well above the 2% consensus estimate). The most recent estimate for the first quarter of 2024 GDP growth from the Atlanta Federal Reserve is 4.2%, indicating that the economy remains strong.
The strong labor market continues to support consumer spending, which accounts for more than two-thirds of GDP. Recently released January nonfarm payrolls data came in at nearly double market expectations at 353,000 (consensus estimate was for 180,000). Additionally, December payroll data was revised higher by more than 100,000. Furthermore, on the jobs front, U.S. wages increased by 4.1% year-over-year based on the employment cost index. This figure remains elevated compared to pre-pandemic readings; however, it is falling from a high of over 5% in 2022. As wage pressures continue to cool, it would likely give the Fed more confidence that inflation will move lower and lead them to lower the fed funds target rate.
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