The animal spirits that animated the “everything rally” at the end of 2023 carried over into the new year, and market participants spent much of January positioned to front-run central bank easing. That translated to a string of record-breaking performances for U.S. equities and a surge in demand for fixed-income securities. Even though markets shed some gains after Federal Reserve Chair Jerome Powell hinted there wouldn’t be any immediate rate cuts, the major U.S. equity indices still managed a reasonable 1%+ return for the month.
Returns % as of 1/31/24
be guaranteed or warranted. Please see disclosure at the end of commentary for limitations to index performance.
Equity markets were a mixed bag.
As spreads tighten, investors were eager to buy bonds in January and lock in yields before they drop further.
Equity risk factors were a mixed bag for the month. Momentum has gotten off to a hot start for the year, demonstrating significant outperformance across all markets. Size has lagged markets in the United States and International Developed Markets. In the meantime, while negative on an absolute basis, all factors have been relatively positive contributors in Emerging Markets.3
As expected, at its January meeting, the Fed held its benchmark federal funds rate steady between 5.25% and 5.5%. At the post-decision news conference, however, Chair Powell dealt a blow to hopes of a rate cut in March. “I don’t think it’s likely that the committee will reach a level of confidence by the time of the March meeting,” he stated.
The Fed Chair acknowledged the dramatic progress in fighting inflationary pressures in recent months but repeatedly emphasized the need to see “more” data confirming that downward trend.4
Two data points the Fed will be keeping a close eye on are ongoing lower inflation readings (the data has been good here; they want to see more of it) and the labor market. Dramatic softening would cause the Fed to consider rate cuts, but with job growth far outstripping economists’ expectations in January, that prospect doesn’t seem imminent.5
The stock market’s recent run to record highs has been fueled by the “Magnificent Seven”—Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla. Expectations typically play a key role in the price investors are willing to pay for a security, and the stratospheric run these stocks have recently made makes expectations even more pronounced. They have been “priced for perfection.” If they fail to deliver “perfection,” there may be a pullback in price.
Case in point: Microsoft and Alphabet. Microsoft posted revenues of ~$62 billion in its fiscal Q2 ending December 31, 2023, a 17.6% year-over-year increase, which exceeded analyst expectations. That was its best revenue growth in seven quarters, thanks to the release of new AI-enabled Office products. Meanwhile, Alphabet also reported strong results, with total revenue up 13% year-over-year to ~$86 billion.
Yet, despite their success, Alphabet and Microsoft shares declined after the companies’ quarterly reports. Why?
Both firms warned of the high costs of continuing to develop cutting-edge AI products this year. Strong quarterly results were insufficient to persuade investors that their future growth will keep up with the massive investments they plan to make to deliver generative AI.
Microsoft’s shares dropped almost 3%, while Alphabet’s stock dropped almost 7.5% in the immediate aftermath.6
Perfection…missed.
In their award-winning book, This Time Is Different: Eight Centuries of Financial Folly, economists Carmen Reinhart and Kenneth Rogoff systematically reviewed more than 250 financial crises in 66 countries over 800 years, looking for differences and similarities. One of the common threads in all these times and places was that people thought, “This time is different,” and the old rules no longer applied.
Centuries of research have shown us that the old rules still apply—risk and reward are intrinsically related, price matters, diversification is a prudent strategy for risk management, and patience is the key to investing success.
It’s been an unusual few years, and markets have gyrated. Yet we encourage you to refrain from thinking, “This time is different,” and stick with the time-tested investment approaches that have served investors well.
1 Morningstar Direct, January 31, 2024
2 Morningstar Direct, January 31, 2024
3 Morningstar Direct as of January 31, 2024
4 Authers, J. “A Fed Rate Cut in March Is Now Pretty, Pretty Unlikely,” Bloomberg.com, February 1, 2024. https://www.bloomberg.com/opinion/articles/2024-02-01/powell-says-a-fed-interest-rate-cut-in-march-is-unlikely
5 Goldfarb, S. “Hiring Accelerated With 353,000 Jobs Added in January,” Wall Street Journal, February 2, 2024. https://www.wsj.com/economy/jobs/jobs-report-january-today-unemployment-economy-4f3a772e
6 “Microsoft’s and Google’s AI Plans Clouded By Concerns of Rising Costs” (n.d.), Financial Times. https://www.ft.com/content/a062df1d-aaf5-4604-8f97-4444170482f2
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