January Highlights

• Equity returns muted in US & Europe, broadly down in China and Emerging Markets
• Improving GDP and employment data out of the US 
• Fed continues to indicate no rate cuts before April‍

‍U.S. Markets 2024

2024 began much as 2023 went, with large cap stocks leading the way while small caps, which continued to lag¹, on continued high lending rates as the Federal Reserve continues to push the timeline on when rates will ease². 

This large gap in performance between large cap equities and small cap equities has led valuations between the large and small stocks to diverge dramatically³. The valuation gap between the two now sits at levels not seen since the end of 2000, a period in which small caps outperform other US markets significantly.

January continued to see disparate sector performance as interest rate sensitive sectors lagged more growth oriented sectors. 

The Communications, Technology and Healthcare sectors lead the way while Real Estate and Consumer Discretionary brought up the rear. Real Estate in particular has had to challenging few years, with the structural changes to work that emerged after COVID driving down demand for commercial real estate⁴ combined with persistent higher rates have led the sector to see declines of over 13% during the past two years, while the broad stock market has rallied over 10% and the Nasdaq is up over 15%.

Factor returns for January were largely consistent with sector returns as Momentum, Quality and Growth outperformed other factors; a continuation of the factors that drove returns in 2023.

US Economy

Initial reporting for Q4 showed an increase in economic growth, with the annual growth rate clocking in at 3.3%, well above estimates of 2.2% growth. A major contributor to this growth was increased personal spending^5.

January saw the creation of 353,000 non-farm jobs alongside higher than expected wage growth among hourly earners⁶. These numbers were both far above expectations.

These economic factors are contributing to rate cuts being kicked down the road as with economy and job market fairing better than expectations the Federal Reserve is rightly more concerned about the re-emergence of inflation as opposed to needing to add stimulus to the economy in the near term⁷. Market odds for March rate cut, which stood as high as 90% in December, ended January closer to 40%, a large swing in the perceived chance for lower rates sooner rather than later⁸.

Global Markets

Global markets were a tale of two areas, Europe and their markets lagged US returns to a small extent, while most emerging markets struggled significantly, save for Indian equities.

European equity markets bumped along in January. While the economic conditions in Europe continue to be weak, investors do find current valuations attractive⁹, which could drive investment into the region, China, as has been the case for the bulk of the last year, saw market declines of 10.61% during January, and are now down over 27% during the last twelve months. In contrast, fellow BRIC member India saw equity markets rise over 2% in January and over 28% during the previous twelve months. 

This is the continuation of a multi-year performance divergence where China, once the darling of Emerging Markets investors¹⁰, has significantly underperformed not only India but the broader set of emerging economies. Mexico, for instance, is up over 68% during the same period, while Middle Eastern markets are up over 40%. Commentators point to concern over the Chinese government's ability to continue to deliver sustained economic growth for the nation as a driver for the current market malaise¹¹.

Fixed Income Markets

Fixed income markets continue to try and digest the combination of a stronger than expected economy with forecasts of impending rate cuts and the potential for a recession Longer dated treasuries continued to have a wild ride, sinking almost 6% during the month before rallying into month end.

These moves are reflections of longer term yields that crept up early in the month before approaching their December lows by month end.

Global bond yields followed a similar trend to US yields, as markets wait for action by central banks that will provide a more concrete direction for yields and the fixed income markets.

Though fixed income markets were fairly calm during January, there are a number of factors that could create volatility and uncertainty in the markets; inflation rising again, continued or escalating international conflict, and a failure by policy makers to balance growth and inflation¹².

Have a great February!