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January 2024 | Equity Commentary

January 2024 | Equity Commentary


Published on February 22, 2023

U.S. stocks maintained positive momentum to start the new year, with the S&P 500 rising +1.68% in January. In the three months ending January 31, the index gained 16%,1 and once again performance in January was driven by the “Magnificent Seven.” The predominant factor driving the sustained rally, in our view, was better-than-expected economic and earnings growth in Q4 2023 and particularly during the holiday shopping season. With 67% of S&P 500 companies reporting Q4 earnings as of February 9, the blended earnings growth rate was 2.9%, with 75% of companies surprising to the upside.2 Positive earnings and upside surprises are happening despite the ongoing drag from the Energy and Materials sectors, and the stock market’s enthusiastic response mirrors what we saw in 2023. In fixed income, Treasury bonds were fairly quiet in January, with the yield on the 10-year Treasury bond barely budging for the month to finish at 3.91%.3

As was the case throughout most of 2023, the U.S. economy grew more than expected in Q4. According to the Bureau of Economic Analysis “advance” estimate, real gross domestic product (GDP) grew at an annual rate of 3.3% in the fourth quarter, which followed the robust 4.9% real GDP growth posted in Q3.4 Both GDP numbers were above estimates, and stood in stark contrast to the near-unanimous calls for recession made at the outset of the year. As we detail below, consumer spending was a key driver of economic growth in Q4 and throughout 2023. But we also saw encouraging productivity data in the second half of last year, with nonfarm business sector labor productivity up 4.9% in Q3 and 3.2% in Q4.5 It may be too early to label this a productivity boom—and certainly too early to attribute it to rapid advances in generative AI—but these gains mark a sharp turnaround from 2022 and will be worth tracking in 2024.

The U.S. consumer remains the primary engine driving economic growth. According to the Commerce Department, U.S. retail sales rose by a seasonally-adjusted 0.6% month-over-month in December, which followed an also strong 0.3% uptick in November. On a year-over-year basis, retail sales rose 5.6% in December, which was virtually in-line with last year’s 5.8% and was about 200 basis points higher than annual inflation for the month.6 For holiday sales specifically, the National Retail Federation reported a 3.8% increase with ecommerce sales growing 8.2% year-over-year, essentially in-line with forecasts.7 This strength in consumer spending flies in the face of suggestions that the consumer was tapped out, particularly due to the resumption of student loan payments.

As we wrote many times last year, we believe ongoing strength in the labor market is the main factor supporting spending. The Labor Department reported jobs growth of 353,000 for January, and December’s payroll gains were revised higher, from the previously reported 216,000 up to 333,000. Overall, the unemployment rate held steady at 3.7% in January—near record lows—and wages continue to rise faster than inflation, empowering consumers. Wage growth was 4.5% year-over-year in January.8 Even with strong consumer spending and jobs market data, consumer confidence has been stubbornly low, likely a byproduct of consumer focus on nominal prices versus rate of change—the latter of which is the Fed’s focus. Housing market affordability may also be a culprit weighing on sentiment. According to the National Association of Realtors, the median sales price of an existing home sold in December was $387,000, compared to $277,000 in December 2019. With 30-year fixed mortgage rates more than doubling since 2022, buying a home is out of reach for a growing number of Americans.9

But January produced early signs that a positive shift in sentiment may be afoot. The Conference Board’s consumer confidence index rose 6.8% from December, with feelings about the business environment and jobs market hitting their highest level since the pandemic. Consumers no longer believe that jobs are “hard to get,” and inflation expectations fell to their lowest level since March 2020. The University of Michigan measure of consumer sentiment painted a similar picture, posting its biggest two-month increase since 1991.10 American households are also looking ahead and seeing the possibility, or even likelihood, of lower interest rates, which may reduce borrowing costs and bring home purchases back within reach. An increase in the number of homes coming on the market may also help—home builder sentiment rose to its highest level in six months, and the Commerce Department reported that a seasonally adjusted 1.09 million homes began construction in Q4, the most in almost two years.9

Another critical area of economic activity is in services, which also reported strong January data. According to the Institute for Supply Management’s (ISM) services-activity index, activity rose from 50.5 in December to 53.4 in January—a substantial increase into expansionary territory and well above consensus estimates. New orders, business activity, and employment all saw growth, and a majority of respondents in the survey said business is steady or improving.11

Fundamental strength in the U.S. economy is arguably one of the main reasons the market has dramatically lowered expectations for a March interest rate cut. The market-implied probability of a cut at the March meeting started 2024 at 84% and fell to 34% by the end of January.12 Higher-than-expected CPI also didn’t help. According to the Labor Department, CPI rose 3.4% in December from a year earlier, a slight acceleration from November’s 3.1% print. Prices rose 0.3% month-over-month, which was also higher than November’s 0.1% month-over-month gain.13 Finally, markets may also be taking Red Sea supply chain disruptions into account. Attacks on vessels continue and ships increasingly divert to routes around the Cape of Good Hope, a move which adds extra time and costs to supply chains. Taken together, in our view a rate cut does not seem likely at least until the May 1 meeting, but perhaps not until June 12.


1.Bloomberg: SPX Index TRA

2.Factset – Earnings_Insight_020924.docx

3.Bloomberg USGG10YR Index

4.Gross Domestic Product _ U.S. Bureau of Economic Analysis (BEA)

5.Gross Domestic Product, Fourth Quarter and Year 2023 (Advance Estimate) _ U.S. Bureau of Economic Analysis (BEA)

6.Census Monthly Retail Trade – Sales Report

7.NRF _ NRF Says Census Data Shows 2023 Holiday Sales Grew 3.8% to Record $964.4 Billion

8.BLS Employment Situation Summary – 2024 M01 Results

9.The Economy Is Starting to Look Normal—Housing Isn’t – WSJ


11.ISM January

12.Bloomberg: Fed Funds

13.Consumer Price Index Summary – 2024 M01 Results

As of January 31, 2024


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