Monthly Market Update - January 2024


  • The conclusion of 2023 was marked by positive inflation news and a dovish Federal Reserve presentation, leading to a 4.5% rise in the S&P 500 for the month and robust annual returns of 26.3%.
  • Bonds also had a positive year, with the Bloomberg U.S. Aggregate Bond Index up 5.5%.
  • Market performance in 2023 varied significantly by sector; Technology soared 57.8%, Communication Services and Consumer Discretionary outperformed the market, and Energy and Utilities experienced negative returns.
  • Looking ahead, there are reasons for both optimism and caution, including skepticism toward predictions for 10-14% profit growth in 2024 and concerns about the housing sector, manufacturing decline, and consumer spending.

All it took to finish 2023 with a flourish was positive inflation news and a dovish Federal Reserve presentation in December that raised expectations for aggressive rate cuts in 2024. The S&P 500 Index rose 4.5% for the month, taking the fourth quarter return to 11.7% and the annual return to a surprisingly robust 26.3%. While one of the notable trends towards the end of the year was the broadening of the market, particularly among smaller stocks, the year will be remembered for the remarkable performance of the "Magnificent Seven," the mega-cap technology stocks that powered the market's return. Boosted by the spirited expectations for artificial intelligence, these seven stocks soared between 49% and 239% for the year, accounting for nearly two-thirds of the S&P 500's 2023 return. Bonds also had a positive year, with the Bloomberg U.S. Aggregate Bond Index up 5.5%.

While all of this was wonderful news for investors, it is important to keep the exuberance in perspective. At the risk of being accused of finding a dark lining in a silver cloud, a quick look backward is warranted. Perhaps already fading from memory is the mood of a year ago, when we were coming off one of the dreariest annual periods in memory, with both stocks and bonds falling double digits in 2022, the first time in modern history when stocks and bonds both declined double digits in the same year. As a result, the two-year cumulative return for the S&P 500 is merely +3.4%, while the Bloomberg Aggregate Bond Index is still down 8.2% since the beginning of 2022.

The equity market has seen twenty percentage point swings every calendar year for the past eight years. The volatility of the equity market is a reminder of the importance of a committed investment strategy and that equity investing is not for the faint of heart.

The markets also reflected the avoidance (to date) of a widely anticipated economic slowdown, which included many credible predictions for a recession. At the start of the year, consensus expectations for GDP growth were at 0.3%, while current estimates for the trailing year are eight times higher at 2.4%.

As has been true for most of 2023, looking beyond the flashy index returns is essential. For the year, the equal-weighted S&P 500 trailed the weighted index by a substantial 12.4%, returning 13.9%. Small stocks, as measured by the Russell 2000, had a banner month in December, returning 12.2%, but that index still trailed the S&P 500 by almost 10% for the year. The action was decidedly on the growth side of the spectrum, with growth stocks returning 42.7% to 11.5% for value. There was an unusual dispersion of returns in 2023 by S&P sector, from Technology, up 57.8%, to negative returns for Energy and Utilities. Returns from Consumer Staples and Health Care were lackluster, while Communication Services and Consumer Discretionary heartily outperformed the market. In other words, where you were in the market in 2023 mattered a great deal, and while diversification may have been a plus for risk management, it was not likely a boost for returns.

Going forward, we see reasons for both optimism and caution. We look at the highly optimistic Wall Street predictions for a broad 10-14% profit growth in 2024 with some suspicion. Take housing, for example. By most estimates, housing and its associated activities constitute some 15% of GDP. By the end of 2023, the median price for an existing single-family home was around $390,000, a price beyond the means of most Americans, even when mortgage rates were historically low. With lending rates pushing 8% in 2023, the housing sector was in a slump. Even if rates come down to 6% in 2024, they will still appear unattractive to four out of five homeowners who are sitting on mortgage rates below 5%, many under 3%. This keeps homes off the market, and a low supply keeps prices high. While artificial intelligence has sparked a boom in server farms, it is hard to see how it will help the housing market and associated businesses such as large appliances and the construction trades. Likewise, the manufacturing sector continued a steady decline throughout 2023 and has been at recessionary levels since the fourth quarter of 2022.

The end-of-year stock rally was powered by anticipated cuts by the Federal Reserve, with expectations for five to seven such events. This optimism will likely require a continued trend for Core Personal Consumption Expenditures (PCE), the Fed's preferred inflation measure, which has dropped from 5.6% in February 2022 to 3.2%. But it is at least equally likely that the economic data will give the Fed pause and support higher rates for longer. As we've been pointing out throughout the year, the rise in credit card debt and, more lately, the holiday boom in buy-now-pay-later purchases suggests a consumer reaching its spending limit with Covid savings long depleted. The consumer constitutes some 70% of GDP, so any downturns there can have a significant impact. One scenario that doesn't seem embedded in the ebullience around future rate cuts is the possibility that they will be necessary in response to economic woes and spiking unemployment. All of which drives us to recommend a careful review of a diversified asset allocation, especially when the risk-versus-reward tradeoff of bonds relative to stocks hasn’t been this attractive in years.

“Madison” and/or “Madison Investments” is the unifying tradename of Madison Investment Holdings, Inc., Madison Asset Management, LLC (“MAM”), and Madison Investment Advisors, LLC (“MIA”). MAM and MIA are registered as investment advisers with the U.S. Securities and Exchange Commission. Madison Funds are distributed by MFD Distributor, LLC. MFD Distributor, LLC is registered with the U.S. Securities and Exchange Commission as a broker-dealer and is a member firm of the Financial Industry Regulatory Authority. The home office for each firm listed above is 550 Science Drive, Madison, WI 53711. Madison’s toll-free number is 800-767-0300.

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