January 2024 MARKET COMMENTARY: Stocks Return

The first month of 2024 brought a return of a recent theme within markets, as blue-chip US stocks led the way to start the year while all other major asset classes lagged behind. The S&P 500 added 1.7% in January to reach its first new closing high in over two years.

Smaller company stock prices surged +12% this month but underperformed large caps for the third consecutive year, with the Russell 2000 index finishing the year at +17%.

Smaller company stocks pared their December gains, with the Russell 2000 index falling -4% this month.

Overseas stocks fell -1%, with losses out of China dragging the MSCI ACWI ex-US Index lower.

Within fixed income, ten-year treasury yields held steady around 4%, despite dwindling hopes for a March rate cut after the Fed’s most recent meeting. The Bloomberg US Aggregate Bond Index fell slightly for the month at -0.3%.

Commodity prices gained +0.4% in January, driven by higher oil prices on the back of continued conflict in the Middle East.

Our data driven Three Dials readings were once again unchanged in January, as we outline below:

1. Market Sentiment and Momentum: (Positive ➕)

An overheated equity market got a much-needed respite during the first few weeks of the new year, though strong buying activity to close the month re-affirmed the current uptrend.

The recent new high on the S&P should be seen as a bullish indicator, since one-year returns after new highs are positive roughly 85% of the time. As such, our Momentum Dial stays in a Positive position.

2. Economic Fundamentals: (Negative ❌)

Forward looking economic data continues to improve off the low levels reached in 2023, most notably in new manufacturing orders, which improved in January for the first time in 17 months.

While it looks like the tide may be starting to turn, we await further confirmation from the economic data before moving our Fundamental Dial out of its Negative position.

3. Valuation: (Negative ❌)

A return to dominance from high growth technology stocks revives the concern over both an overconcentration to the sector within major indexes, as well as risks over lofty price-to-earnings ratios.

So far, tech earnings have justified their growth projections, though it remains a high bar to clear, leaving our Valuation Dial in a Negative position.

Our composite Three Dials reading remains in a Moderately Defensive position through the first month of the year, with two dials Negative and one dial Positive. 

Sources: Morningstar