Weekly Market Performance — January 12, 2024

LPL Research provides its Weekly Market Performance for the week of January 8, 2024. Highlights for the week include S&P 500 Q4 earnings expectations, a rebound for natural gas prices, the small business optimism survey, and the December Consumer Price Index (CPI) report.

Stock Index Performance

S&P 500 Index Sectors

Fixed Income and Commodities

Source: LPL Research, Bloomberg 01/12/24
Disclosures: Indexes are unmanaged and cannot be invested into directly.

U.S. and International Equities

Markets Higher: Following a slow start to 2024, risk appetite returned this week as overbought conditions and interest rates receded. U.S. equity markets advanced, with growth and technology outperforming on the back of lower rates and strong business prospects for artificial intelligence.

According to the most recent American Association of Individual Investors (AAII) survey, sentiment remains bullish. The percentage of bullish investors stayed the same as the prior week’s reading. Bearish investor sentiment inched to 24.2% from 23.5% the prior week.

S&P 500 Index earnings for the fourth quarter are expected to increase 1% year over year (source: FactSet). With typical upside, a 4% increase is a reasonable expectation, following the 5% increase in Q3. What’s interesting heading into this quarter is the above-average reduction in estimates. The consensus estimate for Q4 has been cut by 6.8% since September 30, the biggest since a similar cut in Q3 2022. The bar appears to be set low.

Positives include the resilient economy, easing inflation pressures, a weaker U.S. dollar, and technology strength. Headwinds include deteriorating economic surprise indexes and outsized estimate cuts in healthcare and materials.

Fixed Income Higher: The Bloomberg Aggregate Bond Index ended higher this week as last month’s inflation data lowered rate cut expectations from the Federal Reserve (Fed). High yield bonds gained ground this week, following equities.

What Could Be in Store for Munis This Year: Fundamentals for the asset class are healthy as many municipalities continue to sit on ample rainy day and reserve funds. And though tax revenue collections are likely past peak levels, they remain healthy and above pre-pandemic trends. The wildcard in the short-term remains the supply and demand dynamics for the asset class.

While 2024 issuance could continue the trend of lower net issuance, demand could accelerate as investors seek to take advantage of still-attractive yields by moving out of cash and other shorter-maturity investment strategies before the Fed starts to cut rates, which might happen this summer. With nominal yields above levels seen much of the past decade, still strong fundamentals, and perhaps an improving supply/demand dynamic, LPL Research believes munis could be poised for another solid year in 2024.

Commodities Mixed as Natural Gas Continues Higher: Natural gas prices rebounded for the second straight week amid colder weather and higher demand. West Texas Intermediate finished lower as demand uncertainty and rising production offset an implied geopolitical risk premium. China’s economic picture remains challenged and U.S. production continues at a record pace. Gold prices finished little changed after struggling to surpass key resistance near $2,075.

Economic Weekly Roundup

December Consumer Price Index: December consumer prices increased 0.3% from a month ago, pulling annual inflation up to 3.35% from 3.14% in November. Prices for household furnishings and other durable goods fell, continuing the theme that goods versus services prices are on two distinct paths. Gasoline prices rose 0.2% in December, but that was following a 6% decrease the previous month.

Globally, inflation in Europe continues to challenge policy makers and investors. Annual German inflation is 3.7%, although inflation for the full European Union is below 3%. Despite inflation pressures in Germany, the European Central Bank’s next move will likely mirror the Fed as they are expected to cut their benchmark rate as inflation eases across the region.

December Producer Prices: Producer prices in December declined for the third consecutive month, indicating the pipeline of inflation is clearing and consumer prices will slowly get to the Fed’s 2% goal. Producer prices for final-demand goods fell for the third consecutive month, but financial services prices are still climbing higher. Brokerage and investment services rose 3.3% from a month ago, indicating strong demand for financial advice.

Small Business Optimism: Small businesses felt better about economic conditions in December but are still more pessimistic than before the pandemic, according to the National Federation of Independent Businesses (NFIB). The Optimism Index improved to 91.9 from 90.6 the previous month.

However, the outlook is over 10% below pre-pandemic averages, suggesting that conditions for small businesses are still not back to pre-pandemic levels. Fewer firms plan to raise prices, which should support the disinflationary trend. Only 16% of firms plan to increase employment, down from the peak of 32% in mid-2021.

European Retail Sales: November retail sales declined more than economists expected. Compared with November 2022, total sales declined by 1.1%. Germany, Europe’s largest economy, posted the region’s lowest results as Spain reported a 1.5% increase. Regional fuel sales increased month-over-month, however, all other categories receded.

Weekly Employment Report: Both continuing and initial claims came in below analysts’ expectations and the prior week’s reading for the second consecutive 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.

The Week Ahead

The following economic data is slated for the week ahead:

• Wednesday: Export/Import Price Index (Dec), retail sales (Dec), business inventories (Nov), National Association of Home Builders (NAHB) Housing Market Index (Jan)
• Thursday: Initial and continuing jobless claims, building permits (Dec), housing starts (Dec)
• Friday: Existing home sales (Dec), Michigan sentiment (Jan)