01/13/2024 Market Strategy
Sometimes When It Rains, It Pours
The Haircut That the Market Has Taken Since Its Dec. 6 High Could Be the Pause That Refreshes
Key Takeaways
- The S&P 500’s slide from its Dec. 6 record high now looks like a haircut. The decline from the record high reached 4.3% on Friday Jan. 10, deepening from the prior week’s close.
- The nonfarm payroll survey showed a stronger than expected gain in hiring in December (up 256,000 vs. the 165,000 median forecast). The strong gain sent the jobless rate down a tenth to 4.1%.
- Earnings season gets its unofficial start on Wednesday this week when the big banks begin to report Q4 results. According to Bloomberg, bottom-up estimates put expected earnings growth at 7.3%, the second-highest pre-season estimate in three years.
- This week also brings December inflation data from the CPI and PPI as well as the retail sales report.
As we prepared to publish our Market Strategy Radar Screen this week we could not help to pause first to express our concern for our colleagues, their families, and our clients in the Los Angeles area.
The devastation caused by the high winds and fires over the course of recent days dwarfs in magnitude what we see as the bond market’s current tantrum that has helped take stock and bond prices lower over the last two weeks.
Our most sincere thoughts and prayers are with those suffering the anguish from the losses generated in a disaster which will rank among the worst fires to ravage California.
Events as horrific as these can only be offset in the recovery process that brings people together in the rebuilding efforts that inevitably will follow.
As to the Markets Since the Start of 2025
In our view, the recent volatility and sell off in the bond and stock markets have moved closer to a “haircut” from a “trim” after a decidedly strong jobs number last Friday along with a brace of corresponding economic data last week, suggesting that the US economy is in good enough shape for the Federal Reserve to take more time in the process of cutting its benchmark interest rate than some traders and market participants had hoped for.
As of last Friday’s close, the S&P 500 stood 4.3% off from its recent record high posted on December 6. In the week prior the benchmark had ended the week off just 2.4% from that December 6 record high.
Put in the perspective of the S&P 500’s 23.3% gain in 2024 the price decline since Dec. 6 through last Friday looks like not much of a retracement, but rather the pause that refreshes amidst a bull market supported by sustainable levels of economic expansion and what appears to be watershed levels of innovation in technology.
The end of a period of free money and the start of a process of interest rate normalization is in our view a good thing. As we often have reminded investors an interest rate regime that requires bond issuers (government, corporate, municipal, and others) to pay for the privilege of borrowing money is not a bad thing. It also provides bond buyers and others lending money to institutions and other entities something in return in the form of a coupon (stated interest rate) that can provide some offset to inflation and other normal risks.
Last Week’s Market Action
The US 10-year Treasury’s price fell last week from the week prior, with its yield at the close on Friday at 4.76%—its highest closing level since November 2023.
Stocks moved lower last week as yields moved higher with some corners of the market suggesting that a 10-year Treasury yield at current levels makes bonds competitive with stocks for investor consideration.
We recall similar viewpoints gaining investor attention in 2023. While past performance is no indication of future results, we can’t help but recall the counterpoint to that argument in light of the S&P 500’s price return (before dividends) of 24.2% and 23.3% in 2023 and 2024 respectively.
We remain of the view that at current yield levels bonds remain complementary to stocks for portfolio diversification purposes in intermediate and longer-term portfolios while favoring equities over bonds for potential capital appreciation.
Based on recent economic data the US economy persists being remarkably resilient just a quarter or so shy of three years since the Fed began its rate hike cycle in March of 2022. So far, the Fed has managed to lower inflation from levels that had reached 40-year highs in 2022 while thus far having avoided pushing the US economy into a recession.
With evidence in recent economic data suggesting that inflation could remain stickier for longer our expectations are for the Fed to continue on a path of high sensitivity in practicing its dual mandate of nurturing sustainable economic growth without risking a blow back of untoward levels of inflation while maintaining policy favoring “full employment” — better defined as an unemployment rate somewhere between 3% and 4% — to allow for the dynamics of the labor market. For now, our expectations would be for the Fed to cut rates just twice this year—at mid-year and sometime in Q4 and only if warranted.
This week will likely find market participants busy pondering the unofficial start of Q4 earnings season when the big US banks begin reporting results on Wednesday (January 15) along with the release of the consumer price indexes on the same day.
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