Too Hot or Too Cold

Telemus Weekly Market Review January 1st, 2024 - January 5th, 2024

Stocks concluded 2023 on a positive note, having risen for nine weeks straight, the longest streak of weekly gains since 2004. That positive tone came to a halt when the ball dropped on 2024. Stocks immediately sold off out of the gate on Tuesday’s session and finished the first week of 2024 with the S&P 500 down -1.5%. The technology heavy NASDAQ Composite, which rose 45% last year, had an even rougher start, concluding the week with a loss of -3.3%. 

The selloff began with the start of trading on Tuesday with heavy selling pressure among many of 2023’s winners in the technology sector. We suspect many taxable investors were waiting until 2024 to adjust position sizes given the unexpected gains that occurred in 2023.  The sour mood continued into Wednesday and Thursday’s sessions as well. Market sentiment seemed to shift away from its optimism for stocks and bonds, with more questions around the realistic probability of the U.S. economy achieving a soft landing. 

In our view not much changed. We saw the last two months of 2023 overexaggerating what had been some optimistic economic data points. In fact, this past week there was a heavy dose economic data. The reports supported our outlook heading into the year that the economy remains in firm position, however, activity levels are moderating. During December, industrial activity slowed. New orders also fell from the previous month, an indicator of weaker activity to come. The number of job openings rose slightly indicating employment demand remains strong. The unemployment rate ticked back down to 3.7% with an acceleration in the number of jobs created. What we found mildly concerning from the December employment report was an acceleration in average hourly earnings, which have now increased 4.1% over the past year. This could have an inflationary connotation to it. The uptick in wage gains was most pronounced in the manufacturing sector, likely due to the UAW contract. 

The challenge for markets in 2024 is going to be navigating an environment where the probability of an economic soft landing has increased, however, stocks and bonds have priced this in as a near certainty. There remains a lot of ambiguity on the direction of the economy and therefore we don’t believe it’s prudent to overemphasize the soft-landing scenario. As we look at the next week or two, it’s not unreasonable to expect some continued softness in asset prices as more investors elect to harvest some of 2023’s gains. Our focus is looking broader than the market adjustments that may occur in January, with a greater focus on indications for the direction of the economy and how asset prices reflect these conditions. 

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