Market Review 01/2024

In January, major U.S. equity indices (S&P 500, Nasdaq 100 and Dow Jones Industrial Average) reached their new highs, while yields on 10-year U.S. Treasuries tested December lows. However, the dynamics of equity indices over the past month was not the same. For example, the S&P 500 Equal Weight declined by 0.9% and did not renew the highs reached back in December 2021, remaining 3% below those peaks. The S&P 400 Index, which reflects the performance of mid-cap stocks, was down 1.8% in January, while the Russel 2000 fell by 3.9%. Both indices remain 6.1% and 20.2% below their 2021 peaks, respectively.

The dominance of “Magnificent 7” continues

The top-3 winners and losers at the end of January in the S&P 500 and Nasdaq 100 were identical: NVIDIA, Microsoft and Meta were the biggest contributors to the indices’ gains, while Tesla, Apple and Intel registered the biggest drops. Amgen, Microsoft and Travelers were the Dow Jones leaders, while Boeing, 3M and United Health were the biggest losers. As FactSet notes, the importance of the “Magnificent 7” in the S&P 500 remains unquestioned: collectively, NVIDIA, Amazon.com, Meta Platforms, Alphabet, Microsoft, and Apple are expected to report a 53.7% year-over-year increase in fourth-quarter earnings. If these six companies are excluded, the total earnings decline for the remaining 494 companies is expected to be 10.5% in Q4 2023.

In short, it is not only rainbows and butterflies. The broader market is still under pressure from high interest rates and the pending recession. We keep our expectations unchanged and refrain from opening long positions at current prices. Although contrary to our anticipations, a significant corrective movement in the S&P 500 from the 4650-4700 levels never materialized, reaching and holding the psychological mark of 5000 without any letdowns will be a difficult task. Interestingly, according to Investment Company Institute (ICI) reports, co-investment funds and ETFs investing in stocks experienced an outflow of funds in January – about $24 billion dollars flowed out of the equity funds and the same time, inflows into bond funds totaled $42 billion.

European and US equity markets

A few reasons to be optimistic

Growth in China’s services sector saw a slight deceleration in January, attributed to a decline in new orders – the Caixin/S&P Global services Purchasing Managers’ Index fell slightly from 52.9 in December to 52.7. China’s manufacturing sector maintained its steady pace, with domestic manufacturers experiencing an ongoing progress in both new orders and output – the Caixin Manufacturing PMI stood at 50.8 for the period. At the same time, China experienced the swiftest monthly increase in new home prices in almost 2.5 years, coinciding with the conclusion of a 23-month decline in government land sales.

The Eurozone economy displayed initial indications of improvement at the beginning of the year – HCOB’s composite PMI for the bloc, compiled by S&P Global, increased to 47.9 in January compared to December’s 47.6, thus marking its best reading since July. In January, the decline in the Eurozone factory activity eased for the third consecutive month – HCOB’s final manufacturing PMI rose to 46.6, up from December’s 44.4. Inflation in the bloc moderated, although underlying price pressures declined less than anticipated. Consumer inflation among the 20 nations sharing the united currency was 2.8% in January, 0.1% lower than a month ago.

In January, U.S. manufacturing steadied with a resurgence in new orders, although inflation at the factory level accelerated – the Institute for Supply Management reported that its manufacturing PMI rose to 49.1 from a slightly downwardly revised 47.1 in December. Meanwhile, U.S. consumer confidence reached its two-year peak, buoyed by a deceleration in inflation and anticipation of forthcoming interest rate reductions by the Federal Reserve. In January, the number of job cut announcements surged to its highest level in 10 months, driven by employers in the financial and technology sectors, although the unemployment rate remained steady at 3.7%.

Gold price, USD/oz

And still no breakouts

In January market preferred dollars to euro with EUR/USD pair falling slightly below 1.0800 mark. That did not change the broader picture though, and we continue to sell EUR/USD rallies and look for a test of a large support zone near 1.0500-1.0600, with the first warning signal being the January high of 1.1055.

Precious metals continued struggling with their future direction. Silver was trading within the large triangle, hopefully gathering some energy for the (long awaited) breakout, while gold stayed above the round XAU/USD 2000 number without registering any harsh moves. We still think that it might not be a bad idea to take partial profits at current price levels, as strong dollar keeps pressure on the metals.

Oil and natural gas continue to be a “tough call”. Natural gas is definitely cheap and here we keep small portion of long positions in our investment portfolios. Oil prices tried to move higher from their 5-6 weeks long consolidation, but failed and now “feel heavy”, risking another 10% drop before bottoming out.

Benchmark 10-year bond yields

The Fed shows resilience

At the end of the month, the U.S. Treasury released its borrowing plans for the first two quarters of 2024. A total of $760 billion is planned to be borrowed in the first quarter, which is $55 billion less than announced in October 2023. This news was received with enthusiasm by the market and contributed to a slight decline in yields, including those on 10-year Treasuries. We are still inclined to expect the 10-year yields to go north to 4.35-4.50% in the nearest weeks.

High Yield bond Indexes

On the last day of January, the Federal Reserve held a meeting and, as expected, left the key rate unchanged. Mr. Powell noted that it is premature to talk about a rate cut at the March meeting. Given the strong labor market data on Friday, February 2 (353,000 non-farm jobs created versus 175,000 expected, and upward revisions of 126,000 for November and December), it is indeed premature to expect dovish stance from the Fed at the very moment. The probability of a rate cut in March was at 80-85% as recently as mid-January. By the end of the month, the probability dropped to 20%. Now expectations for the first rate cut have shifted to late April / early May. Expectations for the terminal rate have fallen slightly and now stand at 3.5%, and are not expected to fall to these levels until 2026 at the earliest. In short, the market continues to believe that the economy needs lower rates and the Fed’s procrastination is exacerbating the situation. Time, of course, will tell who will be right in this strange dispute.