Market Update for January 8, 2024
Some of your eyes glaze over when you see a number - I have seen this in meetings for over two decades now - and that is all right! This blog post is for you, I am just going to give you my feelings about where we stand for the short-term, intermediate-term, and long-term, as it relates specifically to the U.S. stock market:
1) Short-Term: The very end of a given year TENDS to be positive, and Q4 was quite positive with October starting poorly and ending well, November being quite strong throughout, and December showing strength until a fairly quiet end to the year. This first week of January has been moderately negative, but I have learned not to put too much stock in the beginning of January pro or con. I remember a year many years ago where the first week was terrible for stocks, and it ended up portending nothing for the full year going forward. Many individuals and entities who bought stocks in the past 6-18 months are up substantially on the position, and selling said position prior to October 31st (mutual funds’ rule) or December 31st (individual person’s rule) would’ve brought the taxable gain into 2023. Waiting for the first week of 2024 moves the gain into the next tax-year. Basically, good, bad, or indifferent, it is wise not to overreact to the first few days of the year.
2) Intermediate-Term: How the market does in January DOES tend to portend how it will do for the rest of the year- there IS historical correlation between January’s performance and the rest of the year. This is called “The January Phenomenon” and was first noted in the Stock Trader’s Almanac, created by Yale Hirsch in 1967. So January’s performance as a whole can be a good leading indicator, and in the second half of last year the U.S. stock market did well for July, struggled for about 3 months, and then did exceptionally well for the last 9-10 weeks. We find ourselves as I write this on January 5, 2024 only a couple percent below the all-time closing high of the S&P 500, but the interesting number to look back on once we hit a new closing high will be what did inflation do since the last time we were there? Depending on precisely when the new closing high happens - and I do think that will be in the coming weeks, although hopefully I am not jinxing it - what will be interesting is how large the inflation delta is over that time period. It is this inflation metric that gives me reason to think the market can continue to grow.
As an example, let’s say Apple was selling iPhones for an average of $1,000 two years ago and $1,200 now. If they’re selling the same number of IPhones now as they were then, wouldn’t it stand to reason its stock price would be higher? In this way, just like inflation hurts end-users, it can HELP companies if they’re able to pass on anything more than their supplier cost increases. And whether they are or are not, rising prices of their goods and services flow down to their bottom line and presumably increase their stock price over time. In short, the theory is inflation increases prices of goods and services, but also, stocks.
3) Long-Term: My career started August 2000, so I will go back to that year to start my analysis of the “long-term.” Stocks did historically very poorly 2000-2010 (the S&P 500 lost a modest amount of money in this decade) and very well 2010-2020 (it almost TRIPLED) and I mentioned in various formats heading into the 2020 decade that I thought performance in the 20’s would be in-between those two goal posts. We are absolutely in between those two extremes, with essentially “average” stock performance since January 1, 2020. Again, I am going out of my way not to use numbers here, but they are easily searchable or I can provide them to you if you’re interested. I believe stocks will continue to grind forward over the coming years, and I would generally expect 2024 to be a positive year for stocks, albeit LESS positive than if stocks had ended 2023 less ebulliently. In other words, some of the 2024 performance was likely taken by the market in the late months of 2023, leaving less “fruit on the vine” for 2024. The Federal Reserve is heavily likely to lower rates in 2024, and that should provide a tailwind for stocks, although many of those gains might be front-loaded to the period before the first interest-rate decrease (i.e. the period we are in now), and into the period after the first few rate decreases. Even before the Fed is done lowering rates, historically speaking the market is already awaiting the next catalyst for optimism, as the current market typically trades on expected events 6-9 months in the future.
As one quick political comment, we have never had an incumbent running against the previous incumbent in modern history for the President. It is usually “He is doing that, I would do this,” but in this case we basically know what we are in for with Biden and Trump, respectively. If those are the two nominees, I am much more interested in the constituents of the Congress than I am who wins the presidency as it relates to stock market performance in late 2024 and into 2025. I am finding less and less reason to trade based on politics, though, for many of the same concerns and eyerolls that all of you share with me in our meetings. Companies make up the stock market, and companies are run by people, and those people are generally as politically disaffected and disgusted as most of us. When political rules change, the people who run the companies react and reposition their people and monies accordingly to take best advantage of the new rules. As long as capitalism reigns, we are not at risk of a major paradigm shift, and as wildly differently as the two major parties see the world, capitalism should still reign in this country.