January 2024 Market Insights
Well, 2023 is over and 2024 has just begun. We want to wish everyone a healthy and prosperous New Year. As we reflect on the markets, my first course of action this morning after logging in to Bloomberg was to calculate the annualized return for the S&P 500 for the period of 12/31/21 to 12/31/23; with dividends reinvested, the index had an annualized return of 1.7%1. Now, if you were asleep for the past 24 months, one could surmise that not much happened. We know the truth to be substantially different. The bond market, as measured by the Bloomberg Aggregate Bond Index, returned -4.2% on an annualized basis for the last two years1. When we look at 2023 in isolation, however, the Bloomberg Aggregate Bond Index returned 5.54% and the S&P returned 26.3%1. While last year certainly helped rebuild some of the losses incurred in 2022, there is still much to consider.
At the end of 2022, the 10-year Treasury had a yield of 3.88% and at the end of 2023, the 10-year Treasury also had a yield of 3.88%1. Of course, in the middle, we hit a low of 3.31% on April 6th and a high of 4.99% on October 19th1. The rally in the fourth quarter was very strong with the 10-year Treasury yield falling from 4.57% to 3.88%1.
Where do we go from here? In my “CIO Corner” blog, I recently wrote about the last mile of this inflation fight for the Fed. Headline inflation peaked at 9.1% in June 2022 and settled in at 3.1% at the end of November1. If the fall in Treasury yield is significant, the fall in inflation is spectacular. The bulls are looking at a mild slowing, inflation moving back into the Fed’s desired range, and a return to more “normal” markets. With over 30 years in the investment world, I am not sure I would recognize a normal market. The bears are arguing that the Treasury will be issuing massive amounts of Treasury bills, notes, and bonds to refinance existing debt and to continue funding the budget deficit that our Government is equally unwilling and unable to move to a balance. This issue, coupled with a tight labor market and continued wage strength, will make it difficult for the Fed to thread the needle for a soft landing.
Looking at economic factors, we do see a mixed bag. On an annual basis, GDP shows the economy growing at 4.9% based on third-quarter numbers1. While CPI is down to 3.1%, the Fed’s preferred inflation gauge, the Personal Consumption Expenditures Index, stood at 2.6% at the end of November1. In other words, it does look like moderating inflation can give the Fed the ability to consider rate cuts. We have been in favor of normalizing monetary policy because if the Fed Funds rate remained at or near zero, there would be little the Fed could do in the face of a recession. Given the current state of the Fed Funds rate, they have ample ability to cut rates to accommodate the economy in a recession.
Unemployment is off the lows, but at 3.7% at the end of the third quarter, the unemployment rate shows that the labor market is running at capacity1. Job growth is slowing, and job openings are also showing signs of deceleration. Wage growth has slowed, but given inflation, union activity, and basic employee pressure, wages are still growing at 4.3% on an annualized basis1. Industrial Production has subsided and has been negative for five of the previous six releases. Capacity Utilization has slowed, and the ISM Manufacturing Index has been in a contractionary condition for months.
What does this all mean? Stocks rallied significantly but were led by a few names. We did see some broadening in the overall stock market during the fourth quarter as the S&P returned 11.68%. When we look at market styles, the Russell 1000 Growth Index was up 13.3% in the fourth quarter while the Russell 1000 Value Index returned 9.47% and the Russell 2000 Index was up 14.0%, showing some resilience in the small cap market1. Corporate spreads in the bond market remained fairly tight and we did see strong results in mortgage bonds. Our continued theme of rebalancing and reexamining asset allocation targets is as sound advice now as ever. Given that the Russell 1000 Growth IIndex returned 42.7% in 2023 versus 11.4% for the Russell 1000 Value Index, rebalancing in equities is prudent to consider1. Also, the strength of stocks versus bonds may cause investors to be more heavily allocated to stocks.
We remain concerned about the consumer because the COVID stimulus and excess savings have been spent and the number of people citing stress in their budgets has increased. Soft consumer spending will have a negative impact on the economy given that consumer spending represents about 70% of our domestic economic activity. We think the next few months will be critical for the path of the overall economy as we weigh changes to inflation with consumer spending, aggregate employment, and the reaction of the bond market to Treasury issuance.
Please contact us if you would like to discuss your individual allocation. I wish you all a healthy and prosperous 2024.
Until next month.
