Stocks have been on a roller coaster ride as they ended the first week of trading in 2024. The Dow is down about a quarter of a percentage point while the S&P is down close to half a point. The NASDAQ was the big loser, down a full percentage point. Bond yields have risen slightly, but not enough to be particularly impactful to equity valuations.
I don’t want to make much of one week’s trading. But January often gives good hints as to what lies ahead. Groups that were up over the last week, a down one for equities overall, include healthcare, consumer staples, utilities and retailers. Healthcare names got lifts from several merger announcements and positive comments at a major health care conference. Staples and utilities are classic outperformers when higher volatility names lose ground. Retailers benefited from a late Christmas season. If there is an economic hint from the first week’s action it would be that the strong optimism of November and December has given way to some skepticism about near term economic growth.
Earnings season starts at the end of this week and will continue into early February. The real focus will be less on Q4 results and much more on management outlooks for the year ahead. Don’t expect much bravado. There are simply too many unknowns. One topic that will get particular attention is prospects for business in China. To be blunt, right now the outlook is pretty lousy. For years, for many companies, growth in China was a lift to overall earnings. That is changing and there are few prospects that economic times in China are going to get any better. Demographics are deteriorating, not only because birth rates are low, but also because an increasing number of highly educated and mobile Chinese are leaving for better opportunities elsewhere. Central government policies are trying to stem the tide by invoking panic. So far, it isn’t working. At best, China is headed down a path Japan traversed after the 1980s. But the demographic realities suggest the situation in China could be even worse. I am not talking about the political headbutting between China and the U.S. I’m talking about old fashioned economic prospects in China. They are deteriorating and no solution is in sight. Given China is the world’s second largest economy, when China sneezes the rest of the world feels the impact.
China alone won’t ruin earnings season or 2024 prospects. Growth in the U.S. is slowing and inflation is in decline. Does that mean Fed Funds rate cuts are coming? Yes, but maybe not as fast as some expect. Tomorrow’s CPI report may give some clues. Shelter costs (40%+ of core CPI) are clearly weakening. But wages are still growing close to 4% and service costs are rising faster than the Fed’s 2% target. The January 2-day FOMC meeting ends January 31. No one expects a rate cut. But all will look for hints that a cut could come as soon as the March meeting. The best the Fed will offer is that every meeting is an open meeting; a rate cut is possible anytime. But there will have to be consistent data suggesting inflation is well on the path to 2% for a cut in rates to happen as soon as March. My guess is that a March cut is less than a 50-50 possibility. What will increase the odds of a March cut are two disappointing employment reports between now and then.
In a nutshell, 2024 earnings commentary during earnings season should dominate the next few weeks. The FOMC meeting will be as close to a non-event as an FOMC meeting can be. No rate increase and inconclusive commentary of future actions. What investors want to watch for the next three weeks is reaction to managements’ forward comments relative to 2024 results. That could well set the direction for stocks over the next several months until economic data can determine whether we are headed for recession or a soft landing.
Today, Jaret Kushner is 43. George Foreman turns 75. Steely Dan co-founder Donald Fagen is 76 while Rod Stewart turns 79.
James M. Meyer, CFA 610-260-2220