The S&P 500 was positive in January by 1.68%, this performance was largely led by growth stocks as the S&P 500 Growth Index was positive 2.89% compared to the S&P 500 Value Index only positive by 0.30%. Mid Cap stocks went negative on the last day of the month, finishing the month at -1.71% and Small Cap stocks were negative by 3.95%. The breadth of the stock market rally we saw during the fourth quarter seemed to wain in January as Large Cap Growth Stocks outperformed the broader market, similar to what we saw for the first 10 months of last year. While the S&P 500 was positive the S&P 500 Equal Weight was negative 0.84%. The tech-heavy Nasdaq slightly underperformed the S&P 500 finishing the month positive by 1.04% but was negative 2.23% on January 31st which cut into its performance.
The sector leaders for 2023 continued to be the sector leaders to start 2024 as Communication Services was positive 5.02% for the month and Information Technology was positive 3.95%. Financials and Healthcare also had strong months to start the year with financials up by 3.05% and healthcare up by 3.01%. The worst performing sector was Real Estate as it continues to be a bit of a rollercoaster ride as the sector contends with higher interest rates. For January Real Estate was negative by 4.74%.
International stocks also underperformed compared to the S&P 500 for the month as the MSCI EAFE was positive by 0.58% while the MSCI Emerging Markets index was down by 4.63%. After a weak start to the month, due to a strengthening dollar, the MSCI EAFE rallied in the second half of the month and finished January in the positive. Emerging Markets negativity was largely impacted by a large weighting to China (31%), as China was down over 10% for the month.
Bonds had mixed results in January and performance largely depended on where you fell on the yield curve as the long end of the yield curve rose and the short end declined. This led to the Bloomberg US Aggregate Bond Index being negative for the month by 27 basis points but when looking at shorter-term bonds the Bloomberg US Aggregate 1–3 year index was positive by 39 basis points.
A lot of investors were hoping for the broad rally that ended 2023 to keep its momentum into January and that asset classes other than Large Cap Growth would continue their strong performance. Unfortunately, that didn’t happen, and Large Cap Growth outperformed while Large Cap Value was positive but underperformed their growth counterparts. Both Small and Mid Cap stocks were negative. Small Cap stocks as tracked by the Russell 2000 Index were off 20% from all-time highs at points during January while the S&P 500 was setting new all-time highs, highlighting the extreme divergence of Large and Small Cap stocks.
The 7 largest stocks of the S&P 500 dubbed the Magnificent 7 whose performance fueled the market for much of 2023 could be setting up to lead the market again as NVIDIA, Meta, and Microsoft all outperformed in January. Although, things can change quickly as the Magnificent 7 became the Magnificent 6 in January as Tesla was negative 24.6% for the month and is no longer one of the 7 largest companies in the S&P 500.
As previously mentioned, January 31st was a very negative day for the markets and wiped out a large percentage of the Large Cap rally we saw to start the year. As inflation has eased, the market has attempted to price in rate cuts that are expected to occur throughout 2024. The first rate cut was anticipated to be in March but Jerome Powell at his press conference on January 31st, not only left rates unchanged in January, he specifically said that a rate cut in March was unlikely, throwing cold water on the markets rate expectations causing a sell off on the last day of the month.
After the Fed announcement, Small Cap stocks ended the 31st negative by 2.57% for the day. Furthermore, every sector of the S&P ended the day negative, with Communication Services being the hardest hit, down almost 4%.
Between now and March we could continue to see some choppiness in the market and a possible market correction would not be abnormal this year after such a strong rally to end 2023. The market had originally priced in 6 rate cuts for the year but even if 5 rate cuts happen this year, this would be an aggressive move downward by the Fed and it’s hard to see the Fed being that aggressive without some catalyst to do so. This catalyst could be a softening labor market or a very weak GDP reading or some other negativity in the economy. If we continue to see the Fed push back cutting rates, it will be interesting to see if the positive market sentiment endures. However, the market could come around and rally in a “higher interest rates for longer” scenario if economic growth remains strong and the downward inflation trend does not revert and go higher.
Although there is uncertainty with Fed policy and interest rates for this year, you should be invested in a portfolio that is specific to you and will help you meet your long-term goals even through any short term uncertainty.
