January brought a month of mixed returns across various asset classes, with certain interest-rate-sensitive segments in the negative. As anticipated, the Federal Reserve kept rates stable, marking the fourth straight meeting in which the Federal Reserve kept rates constant. The recent rally in Small and Mid Cap stocks has cooled, each pulling back with negative returns to kick off 2024, while a market cap divergence has begun to emerge with Large Caps continuing their run higher.
“certain market segments with higher interest rate sensitivity saw a sizeable pull-back during January, such as real estate, small cap stocks, and mid cap stocks. This indicates the market may have been overly optimistic in pricing in rate cuts the past two months.”
December inflation metrics (released in January) came in mixed, as headline CPI increased to 3.35% year-over-year – above expectations of 3.20% and Core CPI, while decreasing slightly to 3.90% year-over-year, was higher than expectations. Core PCE, however, dropped to 2.93% year-over-year while simultaneously beating expectations of 3.00%. The Federal Reserve primarily focuses on PCE metrics (information sourced from businesses as opposed to consumers) as their preferred proxy for inflation, as the PCE index covers a broader range of goods and services. Thus, the overall inflation metrics point to an encouraging trend of easing inflationary pressures.
Additionally, during the January FOMC meeting the Fed concluded to again hold the federal funds rate steady at the target range of 5.25% to 5.50% 1. During the meeting, when Fed Chairman Powell was asked about the path forward and potential interest rate cuts, we received some mixed signals: while he expressed confidence in the likelihood of inflation decreasing, stating, “We believe that our policy rate has likely reached its peak for this tightening cycle, and if the economy progresses as anticipated, it’s probably appropriate to begin easing policy restraint at some point this year.”1 He then went on to emphasize the importance of gathering more data before commencing the easing cycle and that the Fed is “looking for greater confidence” before making any definitive decisions. He stressed that a rate reduction at the forthcoming March 19–20 meeting appears unlikely, indicating that “Based on the meeting today, I would tell you that I don’t think it’s likely that the Committee will reach a level of confidence by the time of the March meeting to identify March as the time to do that.” [1]
In response to some of the mixed inflation data as well as mixed signals and a degree of uncertainty regarding Fed policy direction, certain market segments with higher interest rate sensitivity saw a sizeable pull-back during January, such as real estate, small cap stocks, and mid cap stocks. This indicates the market may have been overly optimistic in pricing in rate cuts the past two months. Further, we are seeing a divergence emerge between large cap equities and small & mid caps, as large caps continued higher while its small and mid cap counterparts have pulled back with negative returns for the month. This divergence may be indicative of a shift in investor sentiment and risk appetite, as investors seek more stability in established large cap companies. However, a large degree of the divergence can be attributed to the dominance of a select handful of mega cap companies pulling the S&P 500 into positive returns for the month.
Last year, market performance was dominated by the prevailing theme of the mega cap “Magnificent Seven” tech stocks leading the way for the S&P 500 and the broader market. This has largely been driven by enthusiasm surrounding the Artificial Intelligence industry, with these seven technology and data focused companies reaping a majority of returns. As 2024 kicks off, the Magnificent Seven cohort is again leading the way. NVIDIA Corp. (NVDA) and Meta Platforms Inc (META) have had the most noteworthy gains to start the year, returning 24.24% and 10.22%, respectively, for the month of January. These two stocks alone now account for over 6.5% of the entire S&P 500 index (which is market cap weighted) and have propelled the large cap sector into positive territory. By contrast, the equal weighted S&P 500 index experienced a -0.82% return for the month, indicating the broader market health is less favorable than what it initially appears.
Download The Full Market Update
~Diligently Yours,
Your Smarter Way Portfolio Management Team
Please note this is for information purposes only and should not be construed as investment advice or recommendations made by A Smarter Way to Invest. Please contact your Advisor if you have any questions about this market update report or if you would like to discuss your personal financial situation in more detail.
