January Market Review and February Market Outlook

Last Month in the Markets: January 2^nd – 31^st, 2024

What happened in January?

The 2023 narrative continued over the month of January as large cap US stocks, led by the tech giants, progressed in their dominant position over the rest of the market. The S&P 500, with a roughly 20% exposure to these companies, started off the month hitting a new high before detracting as a strong U.S. jobs report simmered hopes of a Fed rate cut late in the month.  Shortly afterward, reports showing inflation progress helped facilitate the S&P 500 and Dow reach new all-time highs. In contrast, the Russell 2000, which is an index comprising of US small cap companies, didn’t participate in the rally, ending the month down 3.9%.  With Canada showing less economic resilience than the US, the TSX finished the month with a small gain.  

Internationally, Chinese stocks continued their losing streak and performed exceptionally poorly, with markets expecting that government stimulus measures won’t generate any meaningful economic recovery. This dragged down industrial metals and emerging markets. European markets squeaked out a small gain, but it was offset to a slightly negative return from an American perspective, as the Euro depreciated relative to the USD. The notable performance for the month was that in Japanese equities, with the Nikkei 225 rising over 8.5%. This was due to sentiment of improved corporate governance, a strong computer chip sector, and the depreciation of the Yen relative to the USD, causing foreign investment interest. reuters

Oil rose over 6% due to a relapse of significant geopolitical tensions in the middle east. 

Long term bond yields staged a retracement from their huge decrease at the end of 2023, with continued US economic resilience causing the market to backtrack on its aggressive bet of large rate cuts. The annualized Consumer Price Index for December sits at nearly 4% in Canada and 3.5% in the US, which are well below previous levels but still not at central bank targets.  

          (source: Bloomberg https://www.bloomberg.com/marketsand ARG Inc. analysis)

Here were the key events of the month:

1. January 5^th 

The US nonfarm payroll employment increased 216,000 in December, exceeding analyst expectations and adding to inflation risk. The unemployment rate of 3.7% was based on 6.3 million unemployed in December. One year ago, the unemployment rate was 3.5% and number was 5.7 million.  BLS release   CNBC  Financial Post and jobs  CNBC and jobs and rates

2. January 11^th 

The US Bureau of Labor Statistics (BLS) released the Consumer Price Index (CPI) for December, and year-over-year inflation for 2024.  Consumer prices rose 0.3% in December, up from 0.1% in November.  Over the past 12 months, the all-items index increased 3.4%, compared to 3.1% at the end of November.  Over the past year the Core CPI decreased slightly to 3.9% from 4.0% at the end of November.  BLS CPI release 

3. January 18^th 

After a market correction related to US employment and inflation data, the influence high levels of government spending have on keeping the US economy resilient was highlighted as US equities jumped when Congress approved another stop-gap spending bill to keep the federal government operating until the beginning of March. The S&P 500 and Dow set a new all-time high and this was the eleventh positive week for US indexes out of the last twelve. WaPo and spending bill

4. January 19^th 

The Canadian Consumer Price Index (CPI) rose 3.4% on a year-over-year basis in December, after 3.1% in November.  Increases in gasoline, fuel oil, airfares, passenger vehicles, rent and groceries contributed to the increase in inflation.  For the month, the CPI fell 0.3% in December, after a 0.1% gain in November. CPI Annual Review    StatsCan and CPI    CBC and CPI CityNews

5. January 24^th 

The Bank of Canada held its policy interest rate, the overnight rate, steady at 5%, and the Bank Rate at 5.25%. It also continued its program of quantitative tightening. They stated their anticipation of inflation slowing in 2024 but are waiting to see further confirmation.  BoC release and MPR 

6. January 25^th

Reports were released showing quarterly and annual Gross Domestic Product (GDP) growth. The American economy grew faster than expected for the 4^th quarter and 2023, and inflation cooled for December and in 2023, according to the Bureau of Economic Analysis. In the fourth quarter GDP increased at a 3.3% annualized rate, and 2.5% for 2023.  Strong consumer and government spending was the reason.

The Personal Consumption and Expenditure price index (PCE) rose 0.2% in December and 2.9% for 2023.  Including food and energy, headline inflation rose 2.6% annually at the end of December.  The annualized rate of inflation is approaching the Fed’s low-term average goal of 2%.

The trend seen of higher than expected GDP growth and lowering inflation is defying the economic logic of the US experiencing a recession from tight monetary policy. BEA GDP release    CNBC and GDP    BEA PCE release    CNBC and PCE 

7. January 31^st 

On the last afternoon of the month, the Federal Reserve released its monetary policy update.  Interest rates and the course of quantitative tightening were held steady, which matched market and analyst expectations.  The next Fed interest rate announcement is scheduled for March 20^th.  

The Fed released an accompanying statement suggesting they believe the U.S. economy is performing well enough to not need an easing of monetary policy and lower rates could risk re-igniting inflation.  CME FedWatch   Fed release and presser 

What’s ahead for February and beyond?

The next two interest rate announcements from the Bank of Canada are March 6^th and April 10^th as well as March 20^th and May 1^st for the Federal Reserve.  As February begins, markets have been retracting their view of a March 20^th rate cut from the Fed, with a strong employment data release on February 2^nd   and Fed Chair Jerome Powell leaning into the statement released the end of January, stating on a February 4^th 60 minutes interview that “it’s not likely that the committee will reach that level of confidence [to cut rates] in time for the March meeting.” wsj

In Canada, employment growth has slowed. The last announcement showed that new job creation had ceased, as well as immigration and labour market participation have driven the unemployment rate higher. 

The US the jobs market remains strong, but cracks continue to show, the most recent being the accelerating pace of lay offs in the temporary job market and full-time job numbers contracting. However, due to this resilience, there is a case that the Bank of Canada will start lowering rates before the Fed does. It is not a certainty for either March or April, but consensus is growing that by June, Canadian rates will begin to come down.  bnnbloomberg CBC and BoC rates 

While global economies continue in flux, we are keeping our asset allocation steady, with a tilt towards income and defensive equities, as well as a focus on quality holdings. 

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