“Assume life will be really tough, and then ask if you can handle it. If the answer is yes, you’ve won.” – Charlie Munger
Investors have flipped the calendar to a new year, hoping for a fresh start in the equity market. After a substantial 27% gain for the S&P in ’21, many have been left wondering what comes next, especially after the surprising 19% loss in ’22 and a subsequent 24% gain in ’23. The market has been no less than a rollercoaster ride, with trends shifting multiple times over the last few years.
Sentiment and trends have been unpredictable, with the most recent twist being a 24% gain for the S&P 500 in 2023, defying many investors’ expectations. As we step into the new year, optimism seems to be riding high, fueled by hopes of a quick intervention by the Fed, a resilient economy in an election year, and bullish beliefs in the stock market.
Despite this optimism, it’s essential to exercise caution. The technical picture advises remaining optimistic, but ‘selectivity’ will be the key in Q1, as the market may have a big surprise in store for those who expect a repeat of last year’s trends.
Reviewing Market Action
2024 kicked off with significant repositioning from institutional investors, marking a dramatic departure from the trend seen in 2023. What was hot last year suddenly turned cold, and what was relegated to the backburner in ’23 became the center of attention.
The S&P 500 continued this change of pace with a 0.8% decline on Wednesday, followed by a further sell-off, where the Nasdaq and Russell 2,000 experienced larger drops. Energy, Utilities, and Communication Services were the only sectors to post a gain, signaling a significant reshuffling in market dynamics.
Thursday saw the selling trend persist, with intraday trading erasing earlier gains. The S&P 500, Nasdaq, and Russell 2,000 were all lower, with only Health Care, Financials, and Industrials scraping modest gains. Energy, previously a gainer, reversed its fortune, succumbing to a decline in WTI crude oil, which further exacerbated selling pressure.
Friday brought more volatility, as early gains dissipated, culminating in a last-minute rally that barely offset the week’s losses. This concluded a nine-week winning streak for the S&P 500, the DJIA, and the NASDAQ, as well as back-to-back losing weeks for the Russell 2000. The small-cap breakout has turned unsteady, denting previous cheers for its performance.
Assessing the Economic Landscape
The construction spending report exceeded expectations, posting a 0.4% November gain following substantial upward revisions. However, the US manufacturing sector slipped further into contraction in December, with the ISM index marking the 14th straight month of contraction. The final S&P Global US Services PMI Business Activity Index showed a modest increase, but the rate of growth remains slower than the series average.
The week’s end brought more disappointing news, as the December ISM services index dropped 2.1 points to 50.6, much weaker than anticipated, adding to the concerns about the economy.
