Contributors

Madison Faller

Global Investment Strategist

Our Top Market Takeaways for January 5, 2024.

New Year celebrations came early, and the hangover seems to have kicked in.

The end-of-year rally was staggering: Thanks to the Federal Reserve’s pivot to signal rate cuts ahead, an economy that refused to break and meaningful progress in inflation, 2023 marked the third best year for a global 60/40 stock/bond allocation in the last 20 years – behind only 2009 and 2019. The S&P 500 boasted a 26% rally, and a late comeback from bonds pushed U.S. fixed income to a 5.5% gain that ended a two-year losing streak.

Yet, 2024 hasn’t started on the same high note, and some now worry the best gains are in the rear-view mirror. Mixed economic data, questions over when and how many rate cuts might come and growing geopolitical angst in the Middle East have all played a part. However, we think some choppiness on the heels of a strong rally is to be expected. We still believe in the constructive path forward and investing opportunities we laid out in our Outlook 2024.

Don’t fear one bad week

The end of the year brought tremendous optimism, and it’s possible markets got just a bit too excited. To be sure, the signposts for a soft landing for the economy are there: inflation across the developed world has more than halved, and growth is cooling but solid. But there are still risks, and how fervently policymakers respond with rate cuts should be guided by how the data shakes out in the coming months. Investors seem to be recalibrating and resetting their expectations for what they know today.

Tougher first weeks also aren’t necessarily a foreboding sign of a bad year. Since 1950, we’ve seen 28 other times with a negative first week, and 17 of them (over 60%) still ended the year higher. The start of any year also tends to see choppier trading: Looking at the last 30 years, January and February have seen more volatility than most other months, on average.

We see reasons to be optimistic

While there are many, we’d highlight three.

1) Strength tends to signal more strength.

Heading into Friday, the S&P 500 sits just 2% shy of its all-time high reached two years ago this week. Some worry they’ve “missed it” and question if now is really the time to get invested. But investing at an all-time high versus not hasn’t historically led to a meaningful difference in future returns.

Over the last 50 or so years, if you invested in the S&P 500 at an all-time high, your investment would have been higher a year later over 70% of the time with a median return of 12%. The difference of investing at any time (including at both records and non-records) also doesn’t make that much of a difference (with a median return of 10.5%). We don’t think today’s strong footing is reason to delay getting invested.

The chart describes the S&P 500 index level and all-time highs.

2) Environments like this have historically been a good time to invest.

Times like these – marked by cooling inflation, solid earnings growth and Fed easing – tend to signpost a sweet spot for stocks. For instance, inflation regimes between 2% and 3% usually see the strongest returns for the S&P 500. And, we should also see a triumphant return to earnings growth: By Q4 this year, Street analysts expect S&P 500 quarterly earnings to grow at a year-over-year rate of almost 15%.

The chart shows two graphics, on top the S&P 500 annual returns and the bottom chart is S&P 500 Earnings Per Share (EPS) growth.

We also took a look at historical Fed cutting cycles, in both soft landings and recessions. Going back to 1965, the S&P 500 typically rallies by roughly 15% on average in soft landings in the year after the first cut. What’s more, five of the 10 best years for stocks over that time have happened when the Fed was cutting rates without a recession: 1985 (+32%), 1989 (+32%), 1995 (+38%), 1998 (+29%), 2019 (+31%).

The chart describes S&P 500 performance during Fed cutting cycles since 1965. It’s showing the S&P performance 12 months prior and after first cut.

3) The market may not be as expensive as you think.

The year-end surge in stocks pushed valuations higher, especially as the Magnificent 7 soared. Those seven companies ultimately accounted for 60% of the S&P 500’s 2023 return. Yet as big tech leads the start-of-year losses, some worry its ascent wasn’t sustainable and spells weakness for the broader market.

We’d note that big tech (and tech at large) already went through a major course correction in 2022, refocusing and retrenching to return to profitability in 2023. Now, as Michael Cembalest calls out in his Eye on the Market Outlook 2024 (PDF), the Magnificent 7 are producing healthy cash flows at a rate that well exceeds that of the rest of the market, and profit margins are still improving. Adjusting big tech valuations for their higher long-term earnings growth expectations ahead, the market doesn’t look nearly as overpriced.

Moreover, recently battered parts of the market are actually faring well in the recent volatility: Healthcare, banks, utilities and staples are all outperforming this week.

You don’t need to try to time the market

Market timing can be a dangerous habit – no one has a crystal ball, and while it may feel comfortable to sit in cash, doing so could lead to missing out on opportunities to grow and compound wealth over time.

Getting invested all at once may feel daunting, especially during a tougher start to the year. Phasing in over a few months could be a powerful tool to get started. The below chart looks at the impact of one- and three-year returns for a balanced allocation since 1975, comparing the experience of investing immediately versus phasing in over six or 12 months.

Because stock and bond markets tend to rise over time, deploying all cash up front has usually led to the highest returns – but it comes with more variability. By comparison, phasing in diversifies against timing risk and helps mitigate drawdown risk – without giving up much by way of returns.

The chart shows the one and three-year returns for a balanced allocation.

In the end, making a plan is the most important step. Your J.P. Morgan team is here to think through your portfolio for the year ahead.

All market and economic data as of 1/5/2024 are sourced from Bloomberg Finance L.P. and FactSet unless otherwise stated.

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DISCLOSURES

Index definitions:

The S&P 500 Index is widely regarded as the best single gauge of large-cap U.S. equities and serves as the foundation for a wide range of investment products. The index includes 500 leading U.S. companies and captures approximately 80% coverage of available market capitalization.

The MSCI World Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets. The index consists of 23 developed market country indexes.

The Bloomberg Global Aggregate Bond is a flagship measure of global investment grade debt from a multitude local currency markets. This multi-currency benchmark includes Treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers.

The Bloomberg U.S. Corporate High Yield Bond Index measures the USD-denominated, high yield, fixed-rate corporate bond market. Securities are classified as high yield if the middle rating of Moody's, Fitch and S&P is Ba1/BB+/BB+ or below. Bonds from issuers with an emerging markets country of risk, based on Bloomberg EM country definition, are excluded.

The Bloomberg U.S. Treasury Bills (1-3M) Index tracks the market for treasury bills with 1 to 2.9999 months to maturity issued by the US government. U.S. Treasury bills are issued in fixed maturity terms of 4-, 13-, 26- and 52-weeks.

The Bloomberg U.S. Aggregate Index is a broad-based flagship benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate pass-throughs), ABS and CMBS (agency and non-agency).

The Bloomberg Commodity Index is calculated on an excess return basis and reflects commodity futures price movements. The index rebalances annually weighted 2/3 by trading volume and 1/3 by world production and weight-caps are applied at the commodity, sector and group level for diversification. Roll period typically occurs from 6th-10th business day based on the roll schedule.

The Bloomberg Eco Surprise Index shows the degree to which economic analysts under- or over-estimate the trends in the business cycle. The surprise element is defined as the percentage difference between analyst forecasts and the published value of economic data releases.

The NASDAQ 100 Index is a basket of the 100 largest, most actively traded U.S companies listed on the NASDAQ stock exchange. The index includes companies from various industries except for the financial industry, like commercial and investment banks. These non-financial sectors include retail, biotechnology, industrial, technology, health care, and others.

The Russell 2000 Index measures small company stock market performance. The index does not include fees or expenses.

We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. Opinions, estimates, and investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice.

The views, opinions, estimates and strategies expressed herein constitutes the author's judgment based on current market conditions and are subject to change without notice, and may differ from those expressed by other areas of J.P. Morgan. This information in no way constitutes J.P. Morgan Research and should not be treated as such. You should carefully consider your needs and objectives before making any decisions. For additional guidance on how this information should be applied to your situation, you should consult your advisor.

All companies referenced are shown for illustrative purposes only, and are not intended as a recommendation or endorsement by J.P. Morgan in this context.

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