Authored by :
Michael G. Dow, CAIA, CFA, CPA, Chief Investment Officer
Julien R. Frazzo, Director of Risk Management and Securities Research
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The Quick Facts
- The S&P 500 was up 1.7% in January and up for a third consecutive month.
- Large Cap Growth outperformed Large Cap Value by 2.4% in January.
- Small Caps underperformed the market, with the Russell 2000 Small Cap index down 3.9%.
- The U.S. economy grew at an impressive 3.3% pace in 4Q 2023 while inflation pulled back.
- The Federal Reserve (Fed) kept rates steady while Fed Chair Powell said a March rate cut was unlikely.
- Inflation is slowing faster than expected, but the strong labor market should keep the Fed from cutting rates in March.
The S&P 500 rose 1.7% in January, despite a sharp drop on the month’s final trading day after Fed Chair Powell’s comments indicated that rates would remain unchanged for longer. The month was characterized by new highs, driven by strength from the Magnificent 7 (Apple, Alphabet, Amazon, Meta, Microsoft, Nvidia, and Tesla). The year started cautiously, as large caps regained their leadership position and small caps underperformed. The prevailing narrative leaned toward a soft landing, supported by robust economic releases.
Although the December CPI report showed higher headline numbers, core prices remained steady. Strong 4Q 2023 macro data also dampened optimism that the Fed would start cutting rates as soon as March. The market-implied probability of a March rate cut is now at just 20% from above 50% before the January 31st Fed meeting.
The 4Q earnings season is underway and, thus far, is falling short of expectations. According to FactSet, with 35% of S&P 500 companies reporting 4Q earnings, the results have been subpar. As of the end of the month, the blended earnings growth rate stood at -1.0%, falling short of the anticipated +1.6% growth projected at last quarter’s conclusion. This was primarily attributed to the financial sector, where many banks reported lower-than-expected net interest income. Some big tech earnings have yet to come and may change the trend.
January Asset Class Performance
Sector performance was mixed in January, led by Communication Services (+4.4%), Financials (+3.1) and Technology (+2.7%). Consumer Discretionary (-4.4%), Materials (-3.9%), and Real Estate (-4.8%) were among the laggards. Large Cap Growth outperformed Large Cap Value stocks by 2.4% in January. Over the last three years, the total return of the Large Cap Value and Large Cap Growth indices are relatively close at 30.2% and 33.2%, respectively. The Russell 2000 Index – the world’s most closely followed gauge of smaller companies – was down 3.9% in January, significantly underperforming large-cap indices. The ESG segment of the market, as measured by the MSCI USA ESG Select Index, was up 0.8% in January, 0.9% behind the S&P 500. Over the last three years, the ESG index is up 29.4% and 7.3% behind the S&P 500 on a total return basis. Emerging markets equities also had a poor January, down 4.6%.
At its January 31 meeting, the Federal Open Markets Committee (FOMC) left its key policy rate unchanged against a backdrop of gradually cooling inflation and a surprisingly resilient economy. In its statement, the FOMC said it “does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%,” disappointing investors who had hoped for a quicker dovish pivot. Fed Chair Powell said rate cuts would come once the Fed becomes more certain that inflation will continue to decline from a level characterized as “elevated,” at least on a one-year basis, with the PCE Core index, a key measure used by policymakers, at 2.9% on an annual basis as of December.
Treasuries experienced overall weakness, resulting in a steepening shift in the 3m x 10yr yield curve. January’s equity gains were negatively correlated to small losses in bond markets. The 10-year U.S. Treasury closed at 3.91% vs. 3.88% at the end of December 2023 and from a peak of 5.0% in October 2023. Shorter-term 2-year U.S. Treasury was also relatively unchanged at 4.21% vs. 4.25% at the beginning of the month. The 2y x 10y yield curve remains inverted by 29 basis points at the end of January. The U.S. Aggregate bond index retrenched 0.3% in January, while the Municipal Bond Index closed January down 0.5%.
Oil futures, as measured by the WTI Crude Oil $/bbl., were up 5.9% in January, rebounding from a three-month decline. Gold spot was down 1.1% in January, closing at $2,040 per troy ounce. The U.S. Dollar Index, which indicates the general international value of the U.S. Dollar, strengthened notably, with the DXY rising by 1.9% in January, after three consecutive months of decline. A weaker dollar is generally good news for equity markets and commodities, just as a strong one tends to hold back stocks and other risky investments.
Digital asset valuations were mostly flat in January, with Bitcoin down 0.1% and Ethereum down 0.2%. More than ten years after the first application, spot Bitcoin exchange-traded funds (ETFs) debuted in the U.S. in January 2024. The SEC gave the green light to 11 ETFs for Bitcoin, opening the door to cryptocurrencies for many new investors. We continue to believe that the most appropriate way to think about crypto assets, including Bitcoin ETFs, is as a call option (a highly volatile asset with a high beta to the equity market) on the underlying blockchain technology and we do not recommend exposure to crypto assets in clients’ portfolios.
Interest rate volatility has been constant since the Fed began its rate-hiking cycle in 2022. While equity investors focus on the well-known CBOE Volatility Index (“VIX”), bond investors pay attention to the less well-known ICE BofA MOVE (“MOVE”) Index, which measures bond market volatility. After a fourth spike above 140 in October 2023, the MOVE Index kept trending lower in 4Q 2023 and in January. It remains elevated at 114 compared to historical averages, which reflects the uncertain rate environment. The VIX dropped to below 13 in November after a second-half of 2023 high at 23, below the fear gauge’s long-term average of roughly 20. The VIX closed calendar year 2023 at 12.5 and remained below 15 throughout January 2024.
Chart of the Month – Financial Conditional Index
The Financial Conditions Index (FCI) is a measure that assesses the overall health and tightness of financial markets. It is designed to capture various factors that influence financial conditions, such as stock prices, stock market volatility, credit spreads, interest rates, trade-weighted exchange value of the U.S. Dollar, and other indicators. The FCI helps analysts and policymakers gauge the level of ease or tightness in accessing credit and financing in the economy.
A lower FCI typically indicates loose financial conditions, meaning that credit is more readily available, interest rates are lower, and financial markets are generally supportive of economic activity. On the other hand, a higher FCI suggests tighter financial conditions, which may result from higher interest rates, wider credit spreads, and a more challenging environment for borrowing.
Central banks and policymakers often use the FCI as one of the indicators to assess the overall economic environment and to make decisions regarding monetary policy. By monitoring changes in the FCI, they can gain insights into how financial market conditions may impact economic growth and inflation. The Fed manages the economy based on a “financial conditions framework.” That is, by easing or tightening financial conditions, the Fed can achieve their desired macroeconomic outcomes.
It is hard to overstate just how important the Yellen/Powell pivot of November 2023 was for financial conditions, resulting in 10-year treasury yields falling 105 basis points and stocks rallying 14.1% in the last two months of 2023.
Quote of the Month
“Risk comes from not knowing what you’re doing.” – Warren Buffett
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RELATED LINKS
Macro & Markets: An Update from Beacon Pointe CIO – February 22, 2024 @ 11am PT / 2pm ET
Beacon ‘Pointe of View’ – A Market Update January 2024
Important Disclosure: The information contained in this article is for general informational purposes only. Opinions referenced are as of the publication date and may be modified due to changes in the market or economic conditions and may not necessarily come to pass. Forward-looking statements cannot be guaranteed. Past performance is not a guarantee of future results. Beacon Pointe has exercised all reasonable professional care in preparing this information. The information has been obtained from sources we believe to be reliable; however, Beacon Pointe has not independently verified or attested to the accuracy or authenticity of the information. The discussions, outlook, and viewpoints featured are not intended to be investment advice and do not consider specific investment objectives or risk tolerance you may have. All investments involve risks, including the loss of principal. Consult your financial professional for guidance specific to your circumstances.
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