Welcome to 2024.  We hope that you and your families had an enjoyable and relaxing New Year's holiday and that you ushered in a good start to the year.

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Unfortunately, we couldn’t say the same about the stock and bond markets this shortened first week of 2024.  The market was down the first 4 days of the New Year and is causing concern as the first five trading days are closely watched. Many investors believe the first five-day period is an accurate indicator of what might become of the year. We explore this and other historical patterns later in this Outlook.

The market was weighed down by several negative factors that began before the bell even rang at Broad and Wall on the first trading day of this New Year.

Apple’s demand is slowing.

Barclays downgraded Apple before the market opened to signal the new trading year on Tuesday.  Concerns about demand for iPhones in China appear to be the culprit.  Apple was up 50% in 2023 so it was no surprise that there might be a pullback sometime in 2024 when the New Year resets the capital gain period, one of several reasons we suggested last week there could be profit taking in the near future.  Apple makes up 7% of the S&P index. So when it declined over 3% in the first trading day of the year, it’s not surprising that it took much of the market, especially tech stocks, with it

Fed minutes.

Wednesday, the December Fed meeting minutes were released and indicated that several Fed Governors voiced a much more hawkish posture than had been previously communicated. This weighed on interest rates and produced a selloff in bonds.

New Jobs Created.

Thursday’s ADP report indicated that there was a high likelihood that the Jobs number would be hotter than expected with its release on Friday.  This continued the “hawkish” rhetoric that began on Wednesday and put additional weight on the stock market.

Friday, the labor market reported the addition of 216,0000 jobs in the month of December, up from 173,000 the previous month.  Economists surveyed by Bloomberg had expected 175,000.

We had our first negative week after a 9-week rally in the markets and ended the week with the 10-year interest rate above 4%, a seemingly important line in the sand for many fixed-income investors.

Data from the Bureau of Labor Statistics released on Friday showed the unemployment rate was 3.7% for the month, the same as reported in November.  Most economists had expected the unemployment rate to tick higher to 3.8%.

Investors were closely watching for signs of whether the Federal Reserve can avoid a recession in 2024 and achieve the so-called soft landing, where inflation retreats to the Fed’s goal of 2% without a recession.  This will have an important impact on the Fed’s timeline for cutting rates this year.

Here is a look, day by day of the different stock indices along with other markets including bonds (TLT), the metals (GLD & SLV) and the US Dollar (UUP) which saw strength from the rise in interest rates. See below:

Small-cap and Technology stocks were the hardest hit after their big gains during November and December.  Perhaps the Santa Claus Rally came early as a direct result of the Fed Pivot which we wrote about the last two weeks.  If you wish to review these Market Outlooks, the links are below.

Dec. 24^th: Plenty of Market Gifts This Year! What’s In Store for 24? (Part 1)
Dec. 31^st: Well Beyond The Forecasts. What’s in Store for 2024? (Part II)

Coming into 2024.

After the good year in the S&P 500 (up 24.6%) it was apparent that we were experiencing a powerful appetite for stocks as more than $39.4 billion of inflows came into the equity markets, an amount not seen for a decade.  See chart below:

Due to these inflows and big returns in both November & December in most, if not all of the stock indices/markets, it is no surprise to see that the S&P 500 index became stretched with the price action hitting the top of its longer-term channel.  It was no surprise that we got a swift retracement and bounce off the top of this channel.  See chart below that illustrates this clearly:

As evidenced from the 4^th quarter of 2023’s money flows and sensational market rally, investors had shifted from October’s caution to a sentiment of extreme greed.  Even with this week’s pullback, this indicator still shows a high level of greed.  These periods often precede a pullback in stocks.  Courtesy of our colleague Jeff Hugh of Alpha Insights.  Obtain his information at www.JHWInvestment.com.  See the fear/greed chart below:

Even with this extreme enthusiasm for stocks, it will likely surprise you that investors continued to pour money into money market funds during 2023.  Perhaps it was the specter of earning 4-5% on money market deposits or a fear that the good markets would not or could not hold up.  The opportunity costs were high.  See the chart below:

So far in 2024, the Magnificent 7 (AAPL, AMZN, GOOG, MSFT, META, NVDA, TSLA) which account for more than 30% of the S&P 500 index, gave back most, if not all, of the December returns these stocks collectively made.  To show this more clearly, we use the BIGT (Magnificent 7 ETF) to show the retracement of December’s gains.  See below:

A few bright spots.

If you are a frequent reader to this column, you may recall two weeks ago I posted 14 “predictions” for 2024.  Several of them have started to materialize, although nobody knows if these will continue.  Let’s delve into a few:

1. Value will likely make a comeback during 2024 as Growth stocks have become very pricey. The S&P 500, dominated by the Magnificent 7 and other growth stocks, is currently selling for a 24x P/E on forward 2024 earnings.  The rest of the market, made up of many undervalued “value” stocks, is selling at 17.5 P/E on forward earnings. Much more reasonable.VUGVUG

See a chart comparing Value (VTV) vs. Growth (VUG) from the past few months below. You will notice that right after the “Fed Pivot” at the beginning of November, growth stocks took the leadership and rallied hard into the end of the year.  Value went nowhere.  Notice the quick snapback of Value stocks in just the past week.

2. We suggested that after a long consolidation in health care stocks, we were likely going to see a resurgence in this sector of the market. See a few charts on Health Care below:

3. We mentioned that we thought 2024 would be a year of potential breakthroughs in curing several diseases and Biotechnology could be a big winner. The past few weeks have seen the biotech sector taking off, even during this negative last week.  See the Biotech ETF IBB and one of its biggest components, Amgen below:

4. We also mentioned that if interest rates would hold steady or even decline, financial stocks would be a major beneficiary. After a positive 4^th quarter, we saw financial stocks hold up well this past week.  While interest rates were backing up, banks and financial firms were moving up as well.  See the chart below for XLF, the financial ETF which put in a new 52-week high.

Additionally, you may recall the weakness last March (2023) that occurred when Silicon Valley Bank went out of business and took many of the regional bank valuations down hard.   Right now, the Regional Bank ETF (KRE) has renewed life likely due to the recent interest rate decline.  Lower rates have helped shore up many of these smaller banks' balance sheets.  We also show a chart below for KRE.  Anyone interested in smaller banks?  You should be.

What typically happens after a 20% year?

We reviewed historical statistics on what happens after a year of 20%+ return in the stock market (S&P 500).  In reviewing information presented by several analysts over the past few days, we focused in on what Ryan Carson (The Carson Group) presented:

• There were 20 previous times the S&P 500 gained at least 20%, and it was higher the following year 16 times (80%) and up a median return of 12.1%
• The last time we saw a 20% gain was in 2021, and stocks moved into a bear market the next year (2022), but the nine years before that (and 10 of the last 11) all saw gains after a 20% year.
• It would be rare for stocks to gain more in 2024 than they did in 2023. Only once, in 1997 did the S&P follow-up a year that was up more than 20% with a bigger gain.  Valuations in 1997 were MUCH DIFFERENT than they are now.  The interest rate, debt, and geopolitical environment was very different then as well.
• Another 20% gain is possible as it happened in the four previous years.
  See chart below to indicate the points noted above:

This week, Ryan Detrick of The Carson Group also showed how stocks do on average each quarter of the four-year Presidential cycle.  Similarly, this chart showed a big rally at the end of the mid-term year (2022) and then the first half of the pre-election year (2023), saw a break in Q3 of the pre-election year before rallying hard to end the pre-election year.  Now, as we move into an election year, notice that Q1 tends to be a weak part of the calendar.  The GOOD NEWS is that his chart shows that the rest of the election year tends to be strong.  See chart below:

When the SCR (Santa Claus Rally) doesn’t materialize.

As we showed in last week’s Market Outlook, history has shown what happens when the period right after Christmas through the first week of the year does not produce a positive return for the S&P 500, it could signal trouble ahead for the remaining year.  See the table below:

Our other friend, colleague, and market historian, Jeff Hirsch at The Stock Traders Almanac, offers a chart (below) showing what happens after a 9-week (or more) winning streak comes to an end.  Pay close attention to the columns pointing to a pickup in volatility and choppiness:

For those who use or follow our investment strategies, these can be the type of markets that our quant models, comprised of proven formulaic algorithms and MarketGauge’s Active Risk Management (ARM), can produce above average returns.

For example, our Small and MidCap (SMID) Earnings Growth system dramatically outperformed the markets during the 2022 bear market, especially in the first half of the year when investors rotated in mass away from big cap tech. If you’re interested in market exposure that is specifically focused on stocks that demonstrated an ability to ignore and outperform the Magnificent 7 big cap tech trends, this sector agnostic strategy with an emphasis on lower capitalization stocks with quality earnings growth, and strong price trend strength (TSI) should be considered for your portfolio. As you can see from the chart below, it’s been a proven winner.

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