Image Source: Pixabay

The first week in 2024 was a short trading week. Yet investors sold off stocks, especially tech stocks. Why? The job numbers were better than expected, indicating the United States economy is still growing and jobs are plentiful, reducing the prospect of an interest rate cut. 

Many people did not expect this. Looking back at economist predictions for 2023, 58% said the U.S. would enter a recession, and 69% stated the Federal Reserve could not increase interest rates and lower inflation to 2% without causing a recession. Thankfully, 2023 worked out better than their predictions.

The American economy has proven to be incredibly resilient. In 2023, it overcame a banking crisis, high inflation, rising interest rates, weak manufacturing, a strong dollar, and geopolitical conflicts. Whether 2024 will be more of the same is difficult to predict. But unless job growth slows and unemployment rises, a recession will probably not happen.

The lesson, though, is to buy and hold. Trying to predict stock market returns based on economic predictions is a fool’s errand for the average investor. However, stock markets tend to rise over time.

John Bogle gave a formula for expected returns, which is the sum of earnings growth, price-to-earnings ratio (P/E ratio) expansion or contraction, and dividend yield. Of these, one is known, the dividend yield, while earnings growth can be consistent over a several-year stretch. Only P/E ratio expansion or contraction is challenging to determine because stocks can stay over- or undervalued for years. As a result, I concentrate on dividend growth and income stocks.

Stock Market Overview

After an excellent 2023, data from Stock Rover showed a weak start for the year. The major indices and markets declined on fears that interest rates will remain elevated for an extended time. The Dow Jones Industrial Average (DJIA) finished first. It was followed by the S&P 500 Index, the Nasdaq Composite, and the Russell 2000.

Three of the 11 sectors gained this week. The Utilities, Healthcare, and Energy sectors were top performers. However, the Industrials, Consumer Cyclical, and Technology sectors were the worst performers.

Oil prices recovered this week, ending at ~$74. However, demand remains weak, supply is strong, and the quantity in storage is robust. The VIX gained ~8%+ to 13.4, which is still well below its long-term average. Gold fell to ~$2,052 per ounce.

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Source: Stock Rover

Since it is the first week of 2024, we have posted the one-year returns instead of year-to-date.

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Source: Stock Rover

The dividend growth investing strategy started the year down, but is still ahead of most indices. The table below shows their performance by category.

Source: Stock Rover

Stock Market Valuation This Week

The S&P 500 Index trades at a price-to-earnings ratio of 25.95X, and the Schiller P/E Ratio is about 31.78X. These multiples are based on trailing twelve months (TTM) earnings. The long-term means of these two ratios are approximately 16X and 17X, respectively.

Overall, the market is still overvalued despite the recent correction, the bear market, and the recent rebound seen in the markets. Earnings multiples of more than 30X are overvalued based on historical data.

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