01/21/2024 Market Strategy
Baby It’s Cold Outside
The Indoor Inauguration Brought a Sense of Warmth and Togetherness
Key Takeaways
- Markets shrugged off some worries about the incoming US Administration last week and sent stocks higher worldwide. In the US investors embraced riskier assets, allowing small and mid-cap stock indexes to outperform the S&P 500 last week.
- With only 42 or 8% of the firms in the S&P 500 index having reported it’s too early to say much about results. Prior to the start of the quarter, Bloomberg’s bottom-up estimates put analysts’ expected earnings growth at 7.3% from a year earlier.
- This week 40 more firms are scheduled to report including many more financial firms as well as major names in technology and consumer discretionary. Another 108 firms report the week after.
- This week also brings reports on consumer sentiment and the leading indicator.
A holiday abridged week awaits market investors getting back to work from the long weekend. Market participants will have plenty to focus on with S&P 500 Q4 earnings season gathering momentum with 40 companies scheduled to report.
The US calendar of key economic data is relatively light though laced with updates on services and manufacturing and consumer sentiment. The data flow this week starts slow and gathers momentum in the latter part of the week.
In Washington activity in the Senate will capture the attention of the denizens of Wall Street as the process of confirming a slate of Trump cabinet officials and other high-profile roles in the new Administration is already underway.
As Inauguration Day moved closer, markets that had been somewhat roiled on projections earlier in considering prospects of policy changes and how they might affect the economy appeared to begin to relax and allow a “wait and see” attitude to take over.
Word from the new Administration that any implementation of new or higher tariffs would more than likely have to be part of a thoughtful and measured process rather than a hastily made decision gave a boost to US equity futures over the weekend.
A Modest Rally Provided a Change of Pace Feeling
So far the rally in January has been broad with mid-caps and small-cap stocks gaining back some of the investor attention they’d begun to enjoy last year.
Last week the Dow Jones Industrials, the S&P 500, the NASDAQ Composite, the S&P 400 (mid-caps), the S&P 600 (small caps) and the Russell 2000 (small caps) respectively advanced: 3.7%, 2.9%, 2.5%, 4.5%, 4.4% and 3.9% on the week. On a year-to-date basis the same indices regained earlier lost ground showing respective gains as of the market close last Friday of 2.2%, 1.9%, 1.7%, 3.8%, 2.4%, and 2.05% from the start of this year.
The relative strength of the dollar along with challenges to global economic growth in key international regions around the world has weighed on foreign stocks with the MSCI EAFE index (international developed markets ex-US and Canada) and the MSCI Emerging markets underperforming the US markets for years. That said foreign stocks have begun to garner some attention this year on valuation attractiveness and earnings potential as foreign economic growth prospects improve.
Foreign stocks as measured by three widely followed regional indices have moved higher even as the dollar has remained relatively strong this year. Last week the MSCI EAFE Index, the MSCI Emerging Markets index, and the MSCI Frontier Markets Index were up respectively 1.9%, 1.2%, and 0.97%. The same indices on a year-to-date basis were up 2.3%, 0.5%, and 1.9%.
Bond prices rallied last week sending the yield on the 10-Year Treasury note 13 basis points lower to 4.63% at the close on Friday, January 17. Last week’s economic data showed inflation though still somewhat sticky not likely to necessitate a rate hike but perhaps fewer rate cuts from the Fed this year (as little as two and perhaps none) while the economy, the consumer, and job growth remain resilient.
We remain positive on the outlook for the US economy, the normalization of monetary policy and upside potential for quality stocks. Rallies when they take place are likely to increasingly broaden across sectors, market capitalizations, and style. We persist in favoring cyclicals over defensives; remain overweight US equities while maintaining meaningful exposure to international opportunities. Our favorite sectors remain information technology, communications services, consumer discretionary, industrials and financials.
While we favor dividend growth stocks for their total return potential, fixed income securities in our view remain attractive and complementary to stocks for current income and diversification.
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