Happy New Year – Monday Morning Market Memo – January 1, 2024

Happy New Year – Monday Morning Market Memo – January 1, 2024

For investors, a powerful year-end rally in the stock market, along with nice gains for the year, are certainly making this New Year’s Day a happier occasion.  The major stock market averages closed out last year with an impressive nine-week winning streak – the longest weekly win streak for the benchmark Standard & Poor’s 500 Index since 2004.  For 2023 in total, the Dow Jones Industrial Average rose 13.7% to 37,689 – the NASDAQ Composite surged 43.4% to 15,011 – while the S&P 500 jumped 24.2% to 4,770.  The year was dominated by a couple macro issues along with many market moving events/issues.

Primary themes determining market movement last year included perpetual worries over a recession which never came, along with focus on Federal Reserve monetary policy.  The market spent most of the year predicting/fretting an economic recession was imminent, while at the same time dealing with multiple interest rate hikes by the Federal Reserve.  Consensus opinion shifted late in the year, with belief increasing we would avoid a recession.  This aligned with the highly anticipated Fed-pivot – with strong indications the Fed was not only done raising interest rates but would in fact begin cutting rates.

With forecasts of upcoming interest rate cuts by the Federal Reserve, along with other market forces, the yield on the 10-year Treasury declined from a 16-year high of over 5% earlier in the year, to close Friday just below 3.9%.  As higher interest rates provide competition and act as a headwind to stock prices, the recent drop in yields has been fuel for the stock market rally.  We consider the two factors of current and upcoming lower interest rates/rate cuts, along with overall belief the U.S. will avoid a recession, as the primary drivers behind the strong year-end rally and yearly gains in the stock market.

Looking back at some other notable events of 2023, the financial markets digested turmoil in the banking system (with some regional banks collapsing), fiscal drama out of Washington, geopolitical conflict and energy supply concerns from the Russia-Ukraine and Israel-Hamas wars, along with a boom in Artificial Intelligence stocks led by the Magnificent Seven.  Stock market gains were concentrated in seven Wall Street favorites – AppleAlphabetAmazonMicrosoftMetaTesla and Nvidia.  The rally broadened out late in the year with more stocks and other sectors joining the party…..

The Dow Jones Industrial Average hit a series of record highs in December, and small caps came roaring back from a long period of underperformance.  The Russell 2000 (a small-cap U.S. stock index) bounced back from earlier year-to-date losses and ended the year with a gain 15%.  The market clearly has momentum heading into the new year, and Bulls are hoping the trend is your friend.

Along with positive momentum, the new year kicks off this week highlighted by the Jobs Report.  Expectations are the U.S. Department of Labor will report the economy added 155,000 jobs last month and the unemployment rate ticked up a notch to 3.8%.  Next week, believe it or not, it’s already the start of another earnings season. Investors generally expect much stronger profit growth in 2024 compared to the muted growth in 2023.  Also in the mix this month, is the Federal Reserve policy meeting.

Probabilities are nearly 85% the Federal Reserve will keep interest rates unchanged at this month’s meeting, according to the CME FedWatch Tool.  Further out this year, however, market expectations for those highly anticipated Fed rate cuts really ramp up.  We expect Federal Reserve interest rate policy to be critically important to the markets again this year.  The stock market will likely be disappointed if it does not get the interest rate cuts it is forecasting.  Keep in mind though, over the long haul, earnings and earnings growth are the ultimate drivers of the stock market – so during this long holiday weekend, we are gearing up the most for earnings season!

We wish you a Happy, Healthy & Prosperous New Year!


All the best – Southport Station Financial Management, LLC