Investment Newsletter – January 2024

Despite the S&P hitting multiple all-time highs toward the end of the month, January was a mixed month as far as markets were concerned, because as Deutsche Bank’s Henry Allen writes, financial assets saw a fairly divergent performance. On the one hand, economic data kept surprising on the upside for the most part, which meant equities continued their gains from late 2023, and the S&P 500 reached a new all-time high. However, geopolitical concerns have persisted, particularly given attacks from the Houthi rebels on commercial shipping in the Red Sea. And sovereign bonds also lost ground as investors dialled back the prospect of rate cuts in Q1, with Fed Chair Powell suggesting that a cut by March was unlikely.

January saw several developments for markets, but an important one was that hopes for a soft landing continued, which meant risk assets kept up their momentum from November and December. Likewise in the Euro Area, although growth has been weaker, the single currency area unexpectedly avoided a technical recession in Q4, as GDP was unchanged, rather than contracting by -0.1% as the consensus expected. That positive momentum helped global equities to advance for the most part, with both the S&P 500 (+1.7%) and Europe’s STOXX 600 (+1.5%) posting a third consecutive monthly gain. However, another continued theme from 2023 was how narrow the equity rally was, since the equal-weighted S&P 500 was actually down -0.8% over the month, continuing to lag the overall index

In addition, Chinese equities didn’t share in the broader gains amidst concerns about the economic outlook there, with the CSI 300 (-6.3%) losing ground for a 6th consecutive month and closing at a 5-year low.

Overall, there were more losers than gainers in January in USD terms, with Brent crude oil (+6.1%) topping the list and the Hang Seng (-9.2% in USD terms) the largest decliner. The S&P 500 (+1.7%) and Nasdaq (+1.0%) eked out gains but the Russell 2000 (-3.9%) was lower. Indeed, most global equity and bond markets were slightly lower in USD terms on the month due to a stronger dollar. Returns in many European markets were slightly positive in local currency terms.

Regardless of changes to earnings, sales, or other fundamental data, investors’ desire to buy or sell, if strong enough, can divorce a stock’s price from its fundamentals. The sentiment and changes in investors’ perceptions via valuation expansion or contraction can easily dominate returns. We must respect current sentiment and appreciate recent trends, as “The markets can remain irrational longer than you can remain solvent.”

“Our main concern right now is that the S&P 500 may be starting a tech-led meltup similar to what happened during the second half of the 1990s,” the founder of Yardeni Research Inc. wrote in a note. “We are wondering whether a bout of irrational exuberance might push the multiple higher, inflating a speculative bubble in the stock market as occurred during the late 1990s.”