Weekly Market Performance — January 5, 2024

LPL Research provides its Weekly Market Performance for the week of January 1, 2024. Highlights for the week include an end to nine straight weeks of market gains, hawkish Federal Open Market Committee (FOMC) minutes, and a rebound in oil prices.

Stock Index Performance

S&P 500 Index Sectors

Fixed Income and Commodities

Source: LPL Research, Bloomberg 01/05/24
Disclosures: Indexes are unmanaged and cannot be invested into directly.

U.S. and International Equities

Markets Lower: Both the S&P 500 Index and the Nasdaq Composite began the year lower, snapping nine straight weeks of gains. Overbought conditions and elevated bullish sentiment captured most of the blame for the selling pressure. Growth and technology have been a source of selling, with the Nasdaq Composite suffering back-to-back declines of over 1% to start the year, which has only happened two other times.

According to the most recent American Association of Individual Investors (AAII) survey, sentiment remains bullish. The percentage of bullish investors increased to 48.6% from 46.3% in the prior week. Bearish investor sentiment declined to 23.5% from 25.1% the prior week.

Given the market’s solid gains this past quarter, concerns about stretched valuations have become more widespread as the market enters 2024. Some investors believe equities have become increasingly overbought, as in December nearly half of the S&P 500 traded at a 14-day Relative Strength Index (RSI) of 70, the most in 30 years. That said, it is important to note that in strong uptrends/bull markets, overbought conditions can persist for meaningful periods.

Fixed Income Lower: The Bloomberg Aggregate Bond Index ended lower this week as today’s strong job numbers lowered rate cut expectations from the Federal Reserve (Fed). High yield bonds also lost ground this week after an impressive end-of-year rally.

For many bond sectors, particularly within the core sectors, fixed income yields are just about exactly where they were to start 2023. However, most fixed income sectors generated positive returns last year, as for many fixed income sectors, declining interest rates are not a precondition to generating positive returns.

Coupon income and the organic price appreciation of bonds maturing at par can be the primary drivers of returns, which is what happened last year. Moreover, many bonds are still trading at deep discounts to par and with coupon income at the highest levels in over a decade. Given this backdrop, whether interest rates fall in 2024 or not, the current setup for fixed income, core bonds in particular, is still very attractive.

Commodities Mixed as Natural Gas Rebounded: Oil prices rebounded this week amid increasing Middle East tensions. The geopolitical risk premium in oil offsets a major weekly rise in domestic gasoline and distillate supplies. Natural gas prices rebounded amid colder temperatures. In addition, fundamentals remain murky for the commodity as China’s economic picture remains challenged and U.S. production continues at a record pace. Gold prices declined, reversing four weeks of gains amid a stronger dollar and higher bond yields.

Economic Weekly Roundup

December FOMC Minutes: The Federal Open Market Committee (FOMC) minutes came out as slightly hawkish. Many committee members highlighted elevated uncertainty over the economic outlook. Markets abhor uncertainty, but for now, they seem to be living with that reality. Members noted downside risk to the job market, putting more focus on this week’s labor reports. Both Europe and China were called out in the minutes for weighing down global economic activity.

December Institute of Supply Management (ISM) Manufacturing: Manufacturer pricing declined for an eighth consecutive month as supply chains returned to normal, which should bode well for the future inflation landscape. New orders, a signal for future demand, contracted in November and have been shrinking since mid-2022.

December Job Openings: Job openings fell to the lowest level since March 2021 as we believe the labor market is showing signs of loosening. As the labor market cools, wages should level off and not likely create inflationary pressures this year from the so-called wage-price spiral.

Weekly and Monthly Employment Report: Both continuing and initial claims came in below analysts’ expectations and the prior week’s reading. 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 public and private portions of the economy added 216,000 jobs in December. Excluding the government, firms added 164,000 to payrolls. The ratio of part timers to full timers spiked in December, now above the pre-pandemic rate. Payroll gains continue to be revised downward, typical for periods of slowing economic growth.

Government payrolls grew on average by 56,000 each month in 2023, more than double the average monthly gain the previous year. Employment in leisure and hospitality grew in December but is still 1% below pre-pandemic levels. Retail employment has shown little change on net since recovering in early 2022 from pandemic-related losses. The unemployment rate was unchanged at 3.7% and average hourly earnings grew by 4.1% from a year ago.

The Week Ahead

The following economic data is slated for the week ahead:

• Monday: Consumer credit (Nov)
• Tuesday: NFIB Small Business Index (Dec), trade balance (Nov)
• Wednesday: Wholesale inventories (Nov)
• Thursday: Initial and continuing jobless claims, December Consumer Price Index, hourly earnings (Dec), average workweek (Dec), Treasury Budget (Dec)
• Friday: Producer Price Index (Dec)