During the first month of 2024, analogous to a homing pigeon returning to its roost, the M7 index reverted with a vengeance to the top of the charts, surprising investors who had assumed that market breadth would continue to improve for the 3rd consecutive month. While results from Alphabet Inc. (GOOG.US) and Microsoft Corp. (MSFT.US) account for the one-day reversal shown on the far-right of the one-month indexed price graph below, subsequent earnings from Meta Platforms Inc. (META.US) and Amazon.com Inc. (AMZN.US) more than enabled the domination of market-weighted vs. equal-weighted S&P 500 performance to continue. While we foresee improved market breadth this year, we do not believe small cap stocks (Russell 2000 in yellow) will regain their lustre.
The last 12 months marked a year during which most prognosticators were far off the mark with their forecasts for macro variables, yet still made money given the price gains experienced by pretty much everything financial, except for grain, base metal and energy commodities. The year started with broad agreement that 2022’s soaring interest rates could cause recessions in much of the world, inflation would abate (the question was to what degree), and that at 17.6X forward earnings, the S&P 500 was not cheap.
There’s little question that last month was a clean sweep for markets (and a notable positive month for our funds as well!) as the price of both stocks and bonds gapped higher as most investors shifted their expectations to rate cuts occurring during the first half of 2024. The U.S. dollar was weaker, credit spreads narrowed to new tights, speculative stocks outperformed high-quality stocks and the VIX Index tumbled to near year-to-date lows.
The tug of war between bulls and bears continued during the month of October. Fueled by a still strong jobs market and resilient consumer spending, the U.S. economy sustained its leadership position in global growth. This reality caused markets to increasingly price in the Fed’s ‘higher-for-longer mantra’, although there’s little question that Washington’s relentless bill and coupon issuance has played a significant role in pressing longer term yields higher; another fact not helpful for stocks last month.