Weekly Market Performance — February 2, 2024

LPL Research provides its Weekly Market Performance for the week of January 29, 2024. Highlights for the week include continued gains for equities amid big tech and online retail strength. Energy followed crude oil lower, while real estate lagged after a select number of banks reported unexpected commercial real estate loan losses. In addition, the Federal Reserve’s (Fed) slightly more hawkish-than-expected tone continued to pressure small cap equities.

Stock Index Performance

S&P 500 Index Sectors

Fixed Income and Commodities

Source: LPL Research, Bloomberg 02/02/24
Disclosures: Indexes are unmanaged and cannot be invested in directly.

U.S. and International Equities

Markets Mostly Higher: Equities witnessed a volatile week but ended higher for a fourth straight week. A rebound in manufacturing data, a robust employment report, and better-than-expected earnings from Meta (META) and Amazon (AMZN) kept risk appetite on the table. Solid earnings from industrial companies Parker-Hannafin (PH), Eaton (ETN), and Trane Technologies (TT) further helped propel stocks higher.   

Growth Continues to Lead for January: Communication services (+4.8%) and technology (+3.9%) topped January’s sector rankings, with Netflix (NFLX) and NVIDIA (NVDA), up 16% and 24%, respectively, among the biggest winners.   

Small Caps Remain a Question: The small cap Russell 2000 Index struggled as the Fed’s slightly more hawkish-than-expected tone this week disappointed market participants hoping for a March rate cut. In addition, New York Community Bank’s (NYCB) surprise loss and subsequent dividend cut worried some investors about contagion risk in commercial real estate, causing a pullback in regional banks. Market participants will be keeping a close eye on additional challenges for the smaller banks with heavier commercial real estate loan book exposure.      

Moreover, small cap earnings season has been lackluster.  Strategas noted that the small cap focused Russell 2000 Index could be looking at a double-digit earnings contraction. This will be the fourth consecutive quarter of negative earnings growth if the trend continues. In addition, earnings revisions are not looking positive for the asset class amid the present economic cycle.  

According to the most recent American Association of Individual Investors (AAII) survey, investor sentiment remains staunchly bullish as the percent of bulls jumped by almost 10% this week. Much of the neutral camp became more empathetically bullish on the market’s prospects. Neutral and bearish investor sentiment declined to over 26% and 24%, respectively.      

Fixed Income Higher: The Bloomberg Aggregate Bond Index rebounded amid a hawkish Fed narrative and resilient economic data. High yield bonds gained ground, benefitting from their equity market sensitivity, however, they lagged the benchmark aggregate index.  

The U.S. Treasury Department announced its quarterly borrowing needs this week as it now expects to borrow $760 billion in the first quarter (previous estimate was $816 billion). The smaller borrowing need was driven by higher projected net fiscal flows and having more cash on hand at the start of the quarter than expected, the department said in a statement. That said, the mix of Treasury issuance will be key for the short-term path of interest rates.  

The Treasury has some latitude in determining the mix of short vs. longer-maturity Treasury securities. But with T-bill issuance already above the important 20% threshold, the Treasury may opt for more coupon-bearing securities (2-year and out), which could pressure yields.  

However, with yields still at attractive levels (relative to history), demand has remained mixed but steady as well. And while supply concerns are important, the primary driver of Treasury yields is Fed policy, so as the Fed starts to cut rates, we’re likely going to notice lower Treasury yields as well. As such, we believe investors should use any move higher in yields to add to high-quality fixed income before yields potentially fall from current levels.   

Commodities Mostly Lower: Energy prices lost ground as natural gas prices pulled back almost 25%. Market participants, especially OPEC+, remain concerned about oversupply, especially given milder-than-expected weather forecasts for most of the U.S.  Gold moved marginally higher, continuing to struggle to break through key resistance near $2,075. Continued upward movement in the dollar created additional headwinds for the yellow metal.

Economic Weekly Roundup        

Fed Talk:  January’s Federal Open Market Committee (FOMC) minutes showed the economy’s employment and inflation goals are moving into better balance.  With that said, there is a slight emphasis toward inflation risks.  

Markets are increasingly confident the Fed could make its first cut this spring if inflation continues to move downward and job growth falters. Businesses are set to benefit from falling interest rates this year and if the Fed moves early enough, the economy should evade a hard landing.  With that said, for now, it’s all about the committee gaining greater confidence that inflation is indeed easing.  

As long as supply pipelines remain unclogged and firms do not pass along higher transportation costs to the consumer, we could expect an interest rate cut at the next meeting. Risk assets should benefit as the Fed moves into a new era of monetary policy.

December Job Openings and Labor Turnover Survey (JOLTS) and January Consumer Confidence:  Job openings increased in December on the back of solid holiday demand. Quit rates, an indicator of employee confidence, are down to pre-pandemic levels. Quit rates typically decline when workers expect a lower probability of easily getting rehired. Solid consumer demand drove firms to increase job openings in December.  

In a separate report, consumer confidence in January rose to its highest since December 2021, reflecting the exuberance that the Fed is done hiking rates and will soon cut rates throughout 2024.  Further, plans to buy big-ticket items within the next six months fell across the board as consumers prepare to cut spending.

Weekly and Monthly Employment Report: Both continuing and initial claims came in above analysts’ expectations and the prior week’s reading for the second straight week.  LPL Research believes the labor market is expected to further loosen over the coming months as companies respond to slowing demand, partly driven by the lagged effects of tighter monetary policy.      

Payrolls in the U.S. grew by 353,000, the biggest monthly gain since last January. The unemployment rate was unchanged at 3.7% for January but what we find interesting is the average duration of the unemployed fell to roughly 20 weeks which is right around pre-pandemic levels. Individuals who want to work have no problem finding jobs. However, we still observe weakness in the pool of available workers.   

The labor force shrank for three out of the last four months, indicating an underlying shift in the supply of workers, adding some upward pressure on wages. That’s why we saw a strong gain in average hourly earnings last month. In addition, according to the Household survey, employment also declined for three out of the last four months. 

Week Ahead

The following economic data is slated for the week ahead:

• Monday: Purchasing Managers’ Index (PMI) Composite (Jan), S&P Global PMI Services (Jan), Institute for Supply Management (ISM) Services (Jan)
• Wednesday: Trade balance (Dec), consumer credit (Dec)
• Thursday: Initial and continuing claims, wholesale inventories (Dec)