Published January 12, 2024
We are a couple of weeks into the new year and indexes are generally flat – one week down, one up – after a monster rally to end 2023. The indexes remain at or very near new all-time highs, except for small and microcap stocks – e.g. the companies most likely to suffer from the sharp rise in interest rates. As shown in the following chart, small cap companies hold far more floating rate debt, debt that will have to be refinanced at potentially much higher interest rates. Large cap companies, by contrast, have largely locked in cheap debt maturing well out in time – thus, they are far less impacted by the surge in interest rates. This debt profile weighs down the small cap index.
But the broad market looks very healthy. In terms of sectors, leadership is broad-based as shown in the four charts below. These sectors run the gamut from interest-sensitive homebuilders to tech to cyclical industrials. It’s a wide swath. And they all look strong, having pushed above the prior highs shown as the gray lines.
Now, these are three-year charts – fairly long in time for some people. We could see some amount of pullback and these charts would still be bullish.
Another jolt of bullishness could come from improving consumer sentiment. Sentiment remains in the dumps despite numerous positive economic factors. But it’s a lagging indicator and one that could march higher over the coming two years as strong employment lingers and wage gains take hold. This chart shows consumer sentiment barely better than during the Great Financial Crisis. There’s plenty of upside here. (Note: the red line denotes the average reading of 85).
Where might the improved sentiment come from? Well, falling inflation + unemployment at record low levels + wage growth above 4% for the first time In over 40 years (see chart below). 2024 should bring fatter paychecks while prices of goods and services hold steady – e.g. higher profit margins for households. Add in solid home prices as supply remains slim, and a stock market near record highs, and it certainly seems like it should be a happy place for consumers.
But we wouldn’t count on it. The rancor of election season will undoubtedly muddy things leaving investors more cautious than they otherwise might be. We note that stocks tend to take flight once the election has passed, regardless of the outcome – the certainty alone being enough for stock bulls to go to work.
Market Update
After taking a pause in the first week of the year, stocks resumed their push higher Monday as the Consumer Electronics Show renewed focus on the potential wonders of AI technology. Nvidia broke to new high ground leading a +2% charge in the Nasdaq. A flat day Tuesday followed by another +0.6% push upward Wednesday as a report recommending shares of Meta further boosted the tech sector. The SEC’s approval for a raft of bitcoin ETFs fueled the news Thursday morning. The cryptocurrency has been surging for months in anticipation of the more widespread investor access through ETFs. The broader market was lower, however, on a fresh inflation report that was not as favorable as hoped. Investors are betting on multiple interest rate cuts by the Fed in 2024. Friday brought news of U.S.-led strikes on Houthi rebel targets in the Red Sea; sending oil prices up +4%. Bank reports kicked off the quarterly earnings season with investors largely selling the news despite record earnings for some banks. Airlines also tumbled as Delta reduced their revenue outlook. Despite all of the negatives, stocks held flat Friday in a show of resilience.
Stocks bounced back from their first losing week in over two months with a +1.87% move higher. The Nasdaq (QQQ) recouped the prior week’s loss with a +3.23% gain. But smallcaps were unable to join their large cap brethren. The small cap index (IWM) was unchanged at -0.01%.
Warm wishes and until next week.