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Market Update January 2024

Market Update January 2024

S&P 500 Index closed to about where it was two years ago in 2023. The overwhelming headwind of decades high inflation rate and the fastest tightening cycle in history dragged the markets through a two-year consolidation period that included a Bear market. Recent inflation data now trending towards the Federal Reserve’s (Fed) target ignited a broad-based rally in equities and fixed-income securities. Moreover, Chairman Powel’s comments implied that the FOMC may not hike rates again in this cycle, and that the FOMC was now discussing potential rate cuts in 2024 as it appears for the moment that a soft landing for the U.S. economy is a baseline scenario. Stocks and bonds have rallied in response to the end of the tightening cycle and anticipation of easier monetary policy.









Market fundaments have become very friendly to equity and bond markets as evidenced by a broad-based rally in markets. Most importantly, the Fed is done tightening. Secondly, inflation is on a track that supports rate cuts in 2024, 2-Years and 10-Years Treasury yields have backed off their highs, oil and gas prices are lower, and so is the US dollar. Lastly, employment and economic growth are gradually cooling but not in outright contraction mode thereby supporting modest growth case in corporate earnings. S&P 500 company earnings bottomed out last August and have been rising since then. Historically, a new Bull market often follows a bottom in earnings growth.

S&P 500 companies are projected to report earnings growth of an above average historical rate of 10.6% based on CFRA data. The rosy earnings growth projections imply a soft landing in the US economy. Analyst 2024 bottom-up target price for the S&P 500 is 5090, which is 6.7% above the closing price of 4769. Given economic growth is projected to be below average it is logical to expect earnings growth not above average. Except for the Mag 7 stocks, most of the stocks in the S&P 500 have valuations that reflect average to below average earnings growth. The Invesco equal weight S&P 500 Index ETF trades at a forward multiple of 16, below the 10-Year average of the S&P 500 Index. Most S&P 500 companies are trading at reasonable valuations given a cut in interest rates, earnings grow 7% or more, and inflation is about 3%. The Treasury Inflation Protected Note is trading at 1-Year Expected Inflation of 3%.

Many macro-economic factors must go in the right direction for a soft landing to happen. Markets are projecting six rate cuts in 2024. There likely will be fewer, three. Current macro-economic data says the Fed does not need to cut six times. Bond yields could pop modestly higher in 1H stalling any attempt by equities and bonds to advance higher, but in 2H bond yields could move lower with a rate cut. An economic growth “scare” in 1H because of lag effects of the tightening cycle could be a drag on growth, and so would an expected moderation in government spending, consumer spending, and modest rise in unemployment. For now, there are many macro-economic factors going in the right direction such as wage growth deceleration and job growth.

The stock market is trading in overbought territory and is vulnerable to a pullback this quarter. But pullback should be bought. CFRA Research points out that when the S&P 500 recovered its bear market loses, subsequent declines did not turn into a new bear market. Fed easing financial conditions in 2024 would provide support to equity markets. Furthermore, extended periods without a new record high in the S&P 500 typically spawn above-average performance for the following twelve months once a new high is reached. A study by NDR shows 14 cases of the S&P 500 not hitting a new high over at least one year period. Once a new high is recorded, the S&P 500 index has risen 13 out of 14 times by a median of 13.4% twelve months later confirming the Bull market. Final point, last year was a very good year for the S&P 500 Index. CFRA research shows that after an annual return of 20%, 80% of the time since 1946, the S&P 500 rose an average of 10.0% in the subsequent year. There is no guarantee that history will repeat itself. However, for many fundamental reasons, one being “don’t fight the Fed” when it eases, I see the US stock markets higher by year end.
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