Strong Start to 2024 Continues
The strong run in the S&P 500 that started at the tail end of 2023 has continued through the first 2 months of 2024. In fact, we are seeing conditions that haven’t existed in a very long time. With last week’s close, the S&P 500 will have been up on a weekly basis for 16 out of the previous 18 weeks. When was the last time that happened? Early 1970 - almost 50 years ago!!
Not surprisingly, with such a long weekly win streak taking place, both January and February posted positive months for the S&P 500. According to Ryan Detrick at Carson Investment Research, the S&P 500 has a positive return over the full year 93% of the time going back to 1950 when it posted a positive return in both January and February.
The chart above shows the historical path of the S&P 500 for the year when both January and February are positive. Since 1950, these conditions have been met 28 times, with only 2 instances of yearly loss, 1987 and 2011. As noted above, the yearly return ends up being positive roughly 93% of the time with an average return of 19.9%.
Context for Positive 2024 Market Returns
While historical market analogs can provide interesting context around potential market moves, they shouldn’t be used as standalone indicators. Instead, the data should lend support to an overall fundamental thesis for conditions and direction. As we mentioned towards the end of last year, we saw several factors that pointed to the potential for a rally and consequently decided to move our equity positioning to overweight in our tactical portfolios. Since that point in late September, the S&P 500 has rallied roughly 20% as of March 4, a fairly large move over a 5 month timeframe.
The question now is whether or not such a large move is justified. According to FactSet Earnings Insight, the earnings growth rate for the 4th quarter 2023 was roughly 4%. On the surface that may not seem very strong, but consider the previous 2 quarters saw growth rates of -2% and 0%, respectively, and signs of an upward inflection start to emerge. This is especially true if we look forward to expected earnings growth rates of 3.6%, 9.2%, and 8.3% for the next 3 quarters with projections for 11% for 2024 as a whole. Earnings growth is good for the market.
Since peaking in June 2022, inflation has moved lower and stands within shouting distance of the Fed’s stated target of 2% on an annual basis. Recognizing this, the Fed had guided for 3 rate cuts in 2024 as recently as last month. However, the most recent CPI report cast some doubt on those projections as inflation came in a little hotter than expected. One month certainly does not make a trend, but if we do see a resurgence in inflation it would put the Fed in a difficult position. The market has been operating under the assumption that at best, we will get rate cuts sooner rather than later, and at worst, we won’t see rate move higher than they currently are. If the market had to re-price it’s assumption on the possibility of future rate hikes, it would likely lead to volatility. Maybe not to the extent we saw in 2022, but certainly enough to get investors' attention. We don’t believe we are anywhere near that point as of now and continued improvement in the overall inflation picture will likely be a boost to markets, both equity and fixed income.
The economy remains solid, with GDP, employment, and PMI readings all showing modest growth. Concerns about a potential recession have remained from the near “certainty” of having one in 2023, but the current data simply don’t support the idea that a recession is imminent. Both consumers and corporations remain flush with cash.
We are starting to get questions about the impact of the upcoming election on markets. While the current political climate has been described as “hyper-partisan” by many, it doesn’t change the fact that the market has done well under almost every type of government, whether it be split or unified. According to PNC Asset Management, the average annual performance for the S&P 500, going back to 1933, has been as high as 15.7% for a Democratic President and Senate, with Republican House and as low as 4.9% with Republican President and Democratic Congress. Everything in between ranges from 9% to 13.7%. Bottom line: the political landscape may not have the effect on markets that some believe it does.
Going forward, we wouldn’t rule out some volatility over the short term, as 5-10% corrections are a normal, healthy aspect of any bull market. However, the continued combination of positive seasonality, strong momentum, and solid fundamentals make a strong case for further market strength in 2024.
Weekly Focus – Think About It
“The jealous are troublesome to others, but a torment to themselves.”
- William Penn
Market Activity
Performance last week for the four major asset classes were:
- U.S. Stocks – Russell 3000 (IWV) – Gain of 1.14
- Developed Foreign Markets (EFA) – Gain of 0.78%
- Emerging Markets (EEM) – Loss of –0.30%
- Fixed Income (AGG) – Gain of 0.49%
(Note: performance is based on the change in price plus dividends)
Last Week’s Headlines
- The fourth-quarter earnings season has been strong, suggesting that a reacceleration has begun.
- Fed rates cut expectations have been pushed out due to the surprisingly strong CPI readings from February
Eye on the Week Ahead
- ISM services will give an update on the strength of the economy while nonfarm payrolls will provid an update on labor markets.
If you have questions about the recent price volatility please contact a member of HCM’s Wealth Advisory Team:
Disclaimer:
Any tax or other advice contained in this document, including any attachments, is not intended and cannot be used for the purpose of avoiding penalties under Internal Revenue Code. No action should be taken on any information contained in this message without first consulting with your tax/legal advisors regarding the tax/legal consequences for your particular circumstances.
Additional Notes:
- The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in genera
- Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance
- Past performance does not guarantee future results
- You cannot invest directly in an index
- Consult your financial professional before making any investment decisions
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Doug is the Senior Investment Strategist in the Investment & Research Department. He guides the Investment Committee in developing and implementing HCM’s investment strategies. Doug and his wife Cindy live in West Chester with their two sons. In his free time, Doug enjoys family time, golf, playing and watching hockey, and travel.