Mullaney on the Markets | What a Difference a Day Makes

By Michael Mullaney | Director of Global Markets Research
Published February 2024

Stocks began the new year on a positive note with the S&P 500® Index gaining +1.68% on a total return basis. While +1.68% is nothing to sneeze at, it did fall into the lower 50th percentile of January returns for the S&P 500® Index going back to 1988. The return for the Index through January 30th was much better at +3.34% (a top third showing), but a confluence of events on the last day of the month knocked 1.66% off the benchmark’s return:

  • During the press conference following the January meeting, Fed Chair Jerome Powell indicated that an interest rate cut in March by the FOMC was unlikely. At year-end 2023, a 25 basis-point cut in March had been fully priced in by the futures market.
  • Alphabet dropped by -7.35% on weaker-than-expected Google advertising revenue.
  • Meta Platforms fell by -2.48% as CEO Mark Zuckerberg was grilled by the Senate Judiciary Committee on the mental health dangers posed to young users of both Facebook and Instagram. Other social media platforms were implicated as well.

 

The combination of #2 and #3 contributed to a -3.93% loss for the Communication Services sector on the final day of the month.

Bonds began the year on the downside with the Bloomberg U.S. Aggregate Bond Index falling by -0.27%. While short rates fell, rates from 10-years out rose marginally, causing price losses (-0.52%) to offset income gains (+0.25%) for the Index.

More Losses Than Gains for Sectors

Five of the eleven sectors that comprise the S&P 500® Index posted gains in January. While Communication Services suffered on the last day of the month, the return for the sector over the prior 30 days helped to secure a +5.02% gain for January. Next came Information Technology with a return of +3.95%. While those two sectors together represent a hefty 38% of the market capitalization of the S&P 500® Index, the combination of the two sectors contributed a total of 95% of the Index’s return for the month.

Pulling up the rear was the Real Estate sector with a loss of -4.74% for the month, as commercial real estate properties, health care facilities, and cell tower operators all suffered losses exceeding what would normally be expected from the loss the bond market generated.

Real Estate was followed by the -3.91% drop by the Materials sector, which was hampered by weakness in industrial commodities as nickel, aluminum, and iron ore posted losses ranging from -3% to -6%. Only copper was able to lodge a gain, a paltry +0.4%. The weakness in industrial metals is often linked to the economic malaise emanating from China.

Mixed Results for Risk Factors

Returns of market risk factors were mixed in January as high-quality stocks within the S&P 1500® Index (those rated “B+” or higher by Standard & Poor’s) lagged low-quality stocks (“B” or lower) -0.99% to +6.76% (“risk-on”), but the lowest-beta quintile of the S&P 500® Index beat the highest-beta quintile by 51 basis points, and the Russell 2000® Index of small-cap stocks dropped by -3.89% compared to the +1.39% return generated by the Russell 1000® Index of large-cap stocks (“risk-off”), reversing December’s stellar performance of small-cap stocks.

Growth Beats Value in a Thin Market

In terms of style, value lagged in January with the Russell 1000® Value Index trailing the Russell 1000® Growth Index, +0.10% to +2.49%, the Russell Midcap® Value Index underperforming the Russell Midcap® Growth Index by 125-basis points (-1.79% to -0.54%), and the Russell 2000® Value Index dropping by -4.54% compared to the -3.21% loss of the Russell 2000® Growth Index. The Russell 1000® Value Index was hurt by a narrowing of returns in the large-cap space as the S&P 500® Equal Weight Index lagged the cap-weighted S&P 500® Index, -0.82% to the aforementioned +1.68%, and only 34% of the stocks in the S&P 500® Index beat the return of the overall Index during the month.

Magnificent Seven Help Large-Cap Growth Stocks

The Russell 1000® Growth Index was once again aided by the return of the Magnificent Seven stocks (Apple, Microsoft, NVIDIA, Alphabet, Meta, Amazon, Tesla) which produced an average return of +14.40% for the month and contributed 48% of the Index return, all despite a -24.63% loss for Tesla on a miss on the number of cars produced and a warning of weaker sales expectations for 2024.

International Stocks Do Better in Local Currency Terms as Dollar Strengthens

Returns for developed market international stocks were mixed versus the S&P 500® Index in January, with the MSCI EAFE Index advancing by +2.62% in local currency terms, but only +0.58% in dollar terms. During the month, the dollar advanced by +1.92% as measured by the DXY Index versus a basket of foreign currencies (the Euro, Swiss franc, Japanese yen, Canadian dollar, British pound, and Swedish krona) as chances of a near-term rate cut by the Federal Reserve faded, which helped support the greenback’s rally.

The MSCI Emerging Markets Index suffered in January, falling by -3.48% in local currencies and by -4.63% $USD as the MSCI Emerging Markets Currency Index dropped by -0.95% versus the dollar. The main culprits behind the underperformance of EM were once again China (which fell by -10.45%) and the tension between North and South Korea that led to a -6.72% loss for the latter. 

When Will the Fed Cut Rates?

“When and by how much?” will remain the primary focus points for Fed Watchers going forward with regards to rate cuts. While significant progress has been made in lowering inflation to date, the chance of it lingering at higher-than-desired levels, and perhaps reaccelerating, remain high given the surprising strength of the U.S. economy that is being supported by a robust jobs/wages market that is fueling consumers’ propensity to spend. Nor can new supply-chain shocks from ongoing conflicts in the Middle East be ruled out. Shipping costs in that region are already climbing rapidly.

Barring any additional geopolitical/macro shocks (is the commercial real estate loan stress at New York Community Bancorp truly a “one off” event?) our best guess is that the first rate cut by the Fed will come in June, coinciding with the quarterly update of the “dot plot” and Summary of Economic Projections (SEP), and if we believe the Fed members at their word, two more cuts before the end of the year. For us, the five-to-six cuts that are being priced in by the futures market during 2024 would require a rapid deceleration of economic activity (i.e., recession) to be warranted.

Investors Continue to “Buy the Dip”

For now, investors appear to be continuing to buy into the “Immaculate Disinflation” story where the Fed kills inflation but not the economy, and are comforted by history as since 1928, an “up” January for the S&P 500® Index has produced an “up” year for the Index 80% of the time.

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