A Bumpy Start to 2024 for Stocks

Jeff Buchbinder (00:00):

 

Hello everyone, and welcome to the latest LPL Market Signals. Jeff Buchbinder here with my friend and colleague, Dr. Jeffrey Roach. How are you today, sir?

 

Jeff Roach (00:11):

 

Happy Monday as we're recording. Doing well.

 

Jeff Buchbinder (00:14):

 

Wonderful. Thanks for joining. Glad you're here to help us interpret the jobs report from Friday. But before we go any further, I will mention that it is January 8, 2024, as we are recording this Monday midday, it'll be Tuesday when you all listen to this. First, we'll take a quick peek at these lovely disclosures, and then we will show you our agenda. So here it is. We're going to first start with just a recap of last week, which essentially is a bumpy start for stocks to 2024, although nice to see some green on our screens here on midday Monday. Next, key takeaways from Friday's jobs report. You know, it was an interesting week in terms of watching the bond market and how it reacted to the data, so we'll talk about that.

 

Jeff Buchbinder (01:04):

 

In particular interested in Jeff's take on, on what the jobs report means for the Fed and the treasury market. Next, the Weekly Market Commentary this week is on China authored by our colleague Quincy Krosby. So we'll look at the considerable challenges for China and certainly a lot of them, geopolitical, but also economic as well. So check out that commentary on lpl.com. Great job by Dr. Krosby. Trying to boil down the you know, the China situation in just a thousand words or so. And finally, it's inflation week. Probably could have said inflation week and earnings week. We get the CPI and the PPI plus the start of earnings season. So we'll give you a really brief preview. Probably spend more time on earnings next week. So starting with the market recap.

 

Jeff Buchbinder (01:57):

 

So, you know, it was a disappointing week, the S&P 500 down 1.8%. That ended a nine-week win streak, which was disappointing. Also, we didn't get the Santa Claus Rally that seven-day period, you know, five days at the end of the year. And then the next two trading days. We were down about 1%. So, no Santa Claus Rally. I'll show you what that means in a minute here. We saw generally just risk off across the board, right? You saw more losses for Nasdaq and the Russell 2, you know, down about four and about five respectively. I think one theme to pull out here is that the stuff that didn't work last year is working this year, and vice versa. So if you look at the sectors at the year-to-date column, you see, you know, healthcare, one of the worst performers last year was you know, up 2.1% as of Friday year to date.

 

Jeff Buchbinder (02:54):

 

And then you know, some of the biggest winners last year, the growth sectors. So that's your tech, your consumer discretionary. And then to some extent, communication services. Those sectors have all been down year to date. The mega cap techs generally have not worked this year. So I think that's a theme. We're not necessarily going to make the prediction that that continues. In fact, today the mega cap techs are bouncing back nicely but it's probably going to be kind of a grind. The you know, those growth sectors that have done so well are a little bit expensive. LPL Research does favor those sectors for the full year. But we have seen you know, value and maybe you know, again, the sort of cyclical value that, or defensive that didn't work last year is starting to work a little bit more this year.

 

Jeff Buchbinder (03:46):

 

The only other thing I want to say here is that you're not getting a lot of benefit from going overseas so far. You know, you've got one to 2% declines globally in the major indexes there. I guess Japan has held up a little better, but generally it's been red everywhere. Turn to the bond market. And this is where I want to bring Jeff in. The you know, bond market was down last week. I mean, I guess most of the damage, maybe it was done before the jobs report. But you know, what do you think really contributed to the move higher in yields? You know, that we had the Fed minutes, we had the ISM data, we had the jobs report. What do you attribute that that move in rates to last week, Jeff?

 

Jeff Roach (04:32):

 

Yeah, I think a lot of that could be attributed to the first three trading days of the year. I cut out the Monday, of course, which is a holiday, and Friday being a very volatile payroll day and an ISM services report day. So you had three days, <laugh>, you know, Tuesday, Wednesday, Thursday, you know, perhaps it was coming off of, you know, how the markets were continuing to interpret that confusing tone in the minutes, right? Participants are highly uncertain about the economic outlook, although you could also say the minutes were slightly hawkish for those listeners that are also LPL advisors, they'll see in our Daily Market Update and some of the other communications we've talked about that. So, yeah, it is kind of funny, Jeff, when I look at this this slide, you know, the five day includes last day of last year, <laugh>, because we only had such a short week last week. But you know, a lot of that I think is trying to reset expectations. How aggressive will the Fed cut and will it be somewhere in between what the Fed says they're going to do versus what the market's expecting? The markets are probably over exuberant on 2024 rate cuts, somewhere in the middle. And I think bond markets are trying to adjust to where that's going to land throughout. And we'll see more of that throughout the coming months.

 

Jeff Buchbinder (06:04):

 

Yeah, you know, oil was up a little bit last week. That might've been part of the rate move too. It certainly ties to the stronger dollar, which weighed a little bit on international markets. So, you know, sometimes it's hard to assign a narrative to a specific move in a short period of time. But, you know, I think bottom line, we can't just ignore the Fed. Not quite yet. So here's the S&P 500, you know, we came into the year pretty close to all-time highs. We had overbought conditions from a technical analysis position, that was a recipe for a rollover. And that's what we've gotten, you know, pulling back about 2%. You know, we think we can make a run at 5,000 this year. You know, the high end of our target is 4,950.

 

Jeff Buchbinder (06:55):

 

But it, you know, it's going to be, it's not going to be a straight line right, this you know, dealing with the Fed and the potential for the economy to slow in 2024. That's certainly our base case, you know, could make for a little bit of a bumpy ride. We also have geopolitics and a U.S. election that could certainly cause some volatility. So we still are confident in that outlook. But just want to make the point that it's probably going to be bumpy and you're going to, you know, maybe even have another attempt at, at an all-time high and fail in the 4,800s. The good news here is I mean, that's not all bad news, but the good news here is that the breadth has been pretty good, Jeff. You know, you see almost 90% at these you know, above these positive, very positive momentum indicators, you know, percentage above 50-day moving average percent above 200-day moving average. These are very, very high. I mean, that could mean that we got to roll over or pull back a little more. But you know, again, the good news is a lot of stocks and maybe the market's seeing this today as we're recording this on Monday, that you know, maybe the, some of the weakness was a little bit overdone. And you know, you're seeing a little bit of buying the dip in those big cap techs. What do you think?

 

Jeff Roach (08:14):

 

Mm-Hmm, <affirmative>. Yeah. And I think you could also say the flip side is, you know, you look at that top chart, which is the actual price metric. You, you know, perhaps the rally was a little bit overdone too, right? So you think about coming out of Thanksgiving, going into the beginning of December, people are saying, hey, holiday sales are going to be gangbusters. And it turns out, you know, at the end of the year, you realize, well, it's roughly speaking, if you include both November and December, consumer spending up 3.1% nominal, and then you think, well, wait a second, inflation was somewhere around the 3%. And perhaps when you account for inflation retail sales numbers were not as robust. So I think you could kind of look at both sides and you know, I think a lot of investors are saying, well, maybe we were due for a little bit of this pullback. And but certainly nothing to be worried about, especially as you highlight when you look at the breadth of performance.

 

Jeff Buchbinder (09:16):

 

Yeah, absolutely. Something that we didn't have, you know, all the time last year. Mm-Hmm, <affirmative> certainly. So, I mentioned that you know, the Santa Claus Rally period was down. You know, it's always a little bit dangerous to look at these patterns and get too confident that they're going to play out again. But, you know, now that Santa didn't come, we got, on average a 4% return for the year instead of 10, if Santa did show up. It's just one indicator. We'll see what happens in January. You know, the, I mean, I guess the first five days of January were down two. We've also got the full month indicator. So, you know, these don't always hold. But we are coming into the year kind of on shaky footing which maybe makes, you know, our forecast for mid to high single digit returns more likely than a double digit kind of a year.

 

Jeff Buchbinder (10:04):

 

We'll have to see. So let's turn to the jobs report. And Jeff, I put a couple charts in here just to show people the numbers in case they missed it from Friday. Certainly a lot of people taking vacation, maybe even some people snowed in. So we got 216,000 jobs for December. That was nicely above the 175 consensus, so pretty big upside surprise. And then the unemployment rate held steady. People thought it was going to be, or at least the consensus, thought it was going to be up a 10th. And it was not. So still very, very low. So, clearly the job market is healthy. And then you see the average hourly earnings may be too healthy, right? Because this was a little hot, the consensus was looking for 0.3. We got 0.4 month over month, which translates into a 4.1% year over year increase in average hourly earnings. So, you know, actually that's the second straight month of a little bit of an uptick. So Jeff, what are your, what are your key takeaways here from the numbers now that I've set the stage?

 

Jeff Roach (11:12):

 

Yeah. They're great. These are helpful. I think, you know, the challenge, of course, is trying to read past the headlines. That's one challenge. And of course, you also have to be very careful about just one month readings. So, you know, a lot of market watchers do some type of three month average or six month average. When you average out those monthly gains things are pretty steady. But the slowing trend is still there. I think it's, you know, in the one you know, under 150. When you think about kind of some of those longer term averages, that average monthly gain softer than the 200 plus average gain that we were just seeing, you know, maybe a few quarters ago. I think the thing that I'm highlighting in some of the notes that we're talking to when we've talked to advisors, and that is we're seeing down revisions for the previous two months.

 

Jeff Roach (12:08):

 

That's fairly normal when the economy slows. So that's kind of consistent with that narrative. What is the Bureau of Labor Statistics doing with those previous months numbers as more and more data come in? Just a reminder, by the way, when we talk about revisions, you know, a lot of people start, you know, throwing conspiracy theories. Revisions just means that you know, the government collects the Bureau of Labor statistics collects data first couple of weeks, they have an estimate and seasonally adjust the numbers based on, you know, where we are in the year, right? You don't hire a lot of external painters for projects in January, like you would in July. That's what we mean by seasonal adjustment. But you know, you realize that as more and more data come in, sometimes it comes in after the initial print, hence there's revisions.

 

Jeff Roach (13:02):

 

So just wanted to put that a little bit of a footnote here. So one of the additional thing I think to think about as you think about what the 2024 job market might look like, we're definitely seeing lower job openings. The opening rates are slowing. We're also seeing a little greater slowdown in private payrolls. So when you strip out government payrolls the 216 number, by the way, when you're looking at this screen, that includes both public and private. Private payrolls of course matter in terms of productivity, I think we would all agree, <laugh>, that you want to look at the productive sectors of the economy, what they're doing and some of the services, some of the goods producing areas, et cetera. Not necessarily just looking at what the government's hiring patterns are.

 

Jeff Roach (13:53):

 

So, that's kind of the key takeaways. Labor market is cooling, slowing, that's good for the Fed, right? Because they were concerned about all the openings and not a lot of people looking for work. Also want to highlight there's a pretty significant pullback in labor force participation, meaning people that are actually in the labor force, either working or looking, meaning, it's just a lot less people looking for work. That's a little concerning. Again, that's just a one month thing. So we got to be really careful before we, we build too much of a narrative around just one month's report. Economy is slowing. And it also key takeaway, this is something that's somewhat positive for the Fed meeting they can make that pivot not be too nervous about a re-acceleration of inflation, even though they're starting to talk about outright rate cuts in 2024.

 

Jeff Buchbinder (14:47):

 

Yeah. And then Jeff, another well, actually before we get to another theme that I know you pulled out of the jobs report, I just want to highlight this, the two year movement, you actually flagged this first, right? The initial reaction to the jobs report, which, you know, again, the average hourly earnings number was a little hot. We know the job creation number was a little hot, at least on the headline. The machines immediately sent the 2-year yield sharply higher, right? What were we at? Seven bips, six, seven bips immediately, then, you know, after people peeled back the onion, as I like to say, look what happened. That thing plummeted on Friday, right?

 

Jeff Roach (15:25):

 

That's exactly right. <Laugh>

 

Jeff Buchbinder (15:28):

 

4.46 to 4.32, right? 14 bips.

 

Jeff Roach (15:31):

 

Yeah. Yeah. So, Jeff, you're highlighting there, right there in the middle of screen January 5, this is a three day intraday chart, right? You see Jan 4, Jan 5, Jan 8 and so right there in the middle of the chart is the intraday yields on the 2-year Treasury. You're exactly right, right after the 8:30 Eastern report, Eastern time you know, just absolute you know, massive spike. And then of course, just two hours later or less you have another report saying, hey, wait, the job market in December was not as hot as that headline number suggested. And basically what happened on Friday was the Bureau of Labor Statistics released a report on December hiring, and then the ISM survey released a report on what purchasing managers in the services sectors across the country were reporting in December, two very different contradictory views.

 

Jeff Roach (16:33):

 

Hence, you see that right there in the yields. I'll just take a step back, Jeff. I think this is important for our listeners. This is one of the reasons why it's important to not only look past the headline, but also look at the bond market as you think about at building those expectations for the year. Bond market gyrations are very, very important. And maybe we could argue a little bit more important than some of the movements you see just in stock prices. So, bond markets are key for building out those expectations.

 

Jeff Buchbinder (17:08):

 

Yeah, certainly, now, the market's had plenty of time and we're down, right? But before the report around 4.4 now, kind of in the mid 4.3s on the 2-year, so, and I just checked the fed funds market, and the odds of a March cut are still about 67%. They've been in the 60 to 70 range here for a while. So I think, you know, another takeaway is just that the market's view of the job, the bond market, at least, view of the jobs situation, has really not changed despite all those gyrations. Yeah. So here's another theme, Jeff, you pulled out, which is part-time relative to full-time workers. So what does this tell us?

 

Jeff Roach (17:51):

 

Yeah, it's telling us here that businesses are uncertain on the outlook in the near term. Meaning you know, if they have a decision, they have a project to work on, they have a decision. Am I going to hire someone full-time to work on this project, and then, you know, whatever next project might come. I don't know what that is yet, but hey, we got a full-time worker. The flip side is, Hey, we got a project to work on. I have no idea what, you know, next quarter's business might look like for me. So I'm going to hire a part-time worker to get something done. When you look at the latest numbers, part-time workers relative to full-time is slightly above where things were in 2019. Forget what you see in that graph in 2020 and 2021, for obvious reasons.

 

Jeff Roach (18:39):

 

A lot of unusual things were happening in the year 2020 and the subsequent year. You want to look at relative to pre-pandemic. And I think, again, just an illustration of looking past the headline. Don't get confused right by that initial print like the bond market showed us. So yeah, businesses, I think are communicating a little bit of that uncertainty, and they're preparing wisely for a slowdown. Now, the next question, Jeff, is, well, what does that mean necessary for earnings, right? Where world is as our chief equity guy? And I think we would, we would both agree that businesses have been preparing for a slowdown for several years now, right? Coming out of 2022. And so perhaps, you know, as the economy slows, businesses are in pretty good shape to manage through that slowdown. But that's some of the key points I wanted to highlight for our listeners on this one.

 

Jeff Buchbinder (19:47):

 

Great. We'll get to earnings here again in a little bit, but let's quickly cover China here. Just got a couple of charts from the Weekly Commentary on lpl.com, which we recently, I guess, redesigned. So lpl.com now has a Research tab. And you can get to you know, a lot of our podcasts, videos, commentaries, our blog. You can, you know, see that all on lpl.com. So this is up there now. The several takeaways from the report, I mean, one is just that China's really struggled economically, especially in recent years, and that has caused dramatic underperformance. So when you do a really long-term chart like this, this is the S&P versus the Shanghai composite, and the Hang Seng, you know, which certainly China heavy Hang Seng index. And you see here that the S&P 500, you know, really since the middle of last decade has just, you know, blown away these other markets, right?

 

Jeff Buchbinder (20:47):

 

By, you know, multiples of a hundred percent <laugh>. So this is, you know, it's not a new story that China has economic challenges. It's been a significant drag on its markets, right? So you have the property you know, the debt problems of the property markets, right? You have shadow banking, right? Banks that are, or non-bank lending, I should say, continues to be challenged. The reopening was expected to cause inflation and drive growth. It did not do really either. So they're kind of stuck, you know, Quincy makes the point in the piece about how President Xi at the end of the last year made a, you know, his annual speech to his people. And he was really pretty downbeat, which is a little bit uncharacteristic. They also delayed their third plenum, their annual government officials powwow, which suggests that maybe there's some conflict there, and they're really having a hard time figuring out what to do about their economy.

 

Jeff Buchbinder (21:50):

 

They've been focused more on monetary policy, hasn't really done much tinkering around the edges. So, it's just a really challenging economic environment over there. And you know, that probably doesn't get much easier here in the near term. We'll see, they'll probably get more aggressive with stimulus. But for now, we still think caution is prudent in emerging markets broadly as an asset class and China, investing directly in China. By the way, sort of arbitrary regulatory moves are another reason to be a little bit careful here. You know, a few years ago they nationalized the, for-profit sector, and now they're, it's very unpredictable how they're doing gaming regulations, which has affected some of the big tech companies in China. So you know, Jeff, you just talked about how companies, when they invest in people, they want to have visibility and clarity and confidence, right?

 

Jeff Buchbinder (22:49):

 

Well, that's really hard to have for an investor in China. However, there are a lot of other pieces in the emerging market index that look pretty good to us. So we continue to like India and Latin America. So this chart shows you going back about four years, how strong the Indian and Brazilian and Mexican markets have been, right? Strong outperformance there. While the Hang Seng, we're just basically representing China with the Hang Seng market, has been terrible <laugh>, right? So, I mean, we're talking about what 60, 70% gains in India, while Hong Kong has gone down 45, give or take. So there are still opportunities to invest in emerging markets by country. This is why active management makes so much sense to us in the emerging world. And these opportunities look really good. There's, it's not homogenous, I think is the key. So those are some of the themes. Oh, I actually, one other thing. Taiwan election coming up next week. So how pro, you know, whether the pro-China or pro-Beijing party wins or not will be I think a big determining factor in how worried the markets get about China. So we'll be watching that very, very closely. So anything to add on that topic, Jeff?

 

Jeff Roach (24:12):

 

Yeah, I think you know, we've highlighted India the last several months actually. Just some of the, you know, the fundamental improvements. And now granted, you know, there's still some challenges, infrastructure for example. But you know, some of the fundamental metrics coming out of India, just like Japan, are a couple of countries that we've thought worth highlighting for investors. But you're exactly right, particularly in emerging markets there is quite a lot of dispersion that investors need to be mindful of.

 

Jeff Buchbinder (24:51):

 

Yeah, absolutely. So LPL Research still underweight emerging markets, but like some pieces of it, for sure. So let's transition to the week ahead. It's a really busy week, Jeff, because the inflation data is always important. And then you get earnings season. So why don't you start with the economic calendar, and then I'll make some quick comments on earnings.

 

Jeff Roach (25:11):

 

Right. Right. So, you know, the, the big one will be on the 11th and 12th as well, a little bit, PPIs producer price index for those wondering, but it's really all about CPI, the Consumer Price Index. And the overall narrative is, you know, we're seeing convincing cooling in inflation. We're waiting to see what's happening with shelter, particularly rent and leasing prices, something we need to be watching on that report, as well as some of the services, particularly insurance. Some of those metrics are a little bit frustratingly high. But this should be, you know, adding more convincing support that the Fed pivot is certainly that, you know, the pivot that happened in December is certainly something that is a reasonable subtle shift in policy and building expectations for when that first rate cut will be. At this point, you know, a lot of market participants are thinking it's going to be March certainly not, you know, not a dead giveaway. Perhaps things might not start as soon as March. But this will be key. Again look at some of the services metrics as well as the shelter costs underneath that headline number that'll be reported 8:30 Eastern time on the 11th.

 

Jeff Buchbinder (26:42):

 

Very good, Jeff. And that ties into earnings, just like, you know, the jobs report ties into earnings. So I think certainly margins are going to be important to watch, right? If we're going to beat expectations meaningfully. Right now, consensus is expecting S&P 500 earnings to grow 1% year over year in Q4. We get the big banks on Friday, so we'll start to get, you know, some information to you know, to gauge maybe how much upside or downside we might get. The average upside is three historically, so that points to about four. That seems to be a reasonable place to start. You know, the economic environment's been pretty resilient, so that, you know, speaks to maybe nice upside, although the economic surprise indexes have pulled back a little bit recently. So in other words, the economic data has not been beating consensus expectations by as quite as frequently or by as much as it had been in you know, Q3 when we saw five points of upside.

 

Jeff Buchbinder (27:45):

 

So, you know, maybe that points to a little less upside, but the dollar's been weaker, so that points to maybe upside to international earnings translated back into dollars, right? And then we've also had some pretty healthy revisions from tech. In other words, there's optimism building that tech earnings will be pretty good or tech adjacent, you know, because some of the tech earnings are actually in other sectors, so that's a positive. But then we've seen healthcare earnings and materials earnings get slashed pretty aggressively over the last few months. So that's a little worrisome, right? So you've got, I think, headwinds and tailwinds. You mix all that together and, you know, frankly, I'd be surprised if we did, you know, something north of five for earnings. But you know, maybe that four to 5% year over year growth rate range is a reasonable place to be. Now because estimates have been cut.

 

Jeff Buchbinder (28:43):

 

You know, the expectations for Q4 earnings were about 7% mid-year, right? So they've been cut or actually going into Q4 at the end of Q3. So that suggests that the bar is low and can be cleared. And I think actually margin expectations might be a little bit too conservative. So if we're going to get that three, four points of upside that we hope to get, it's probably going to be because margin estimates are a little too conservative given we've had inflation come down, you know, labor markets cooled off a bit, as Jeff alluded to, that might be good for margins. So, you know, feels to us like it's a pretty easy two, three points of upside, but maybe the base case should be three to four points coming in and we'll just have to have to wait and see. So those are my thoughts on earnings. The big banks on Friday are going to get a lot of attention. Jeff, any closing remarks on the earnings season coming up? Or should we go ahead and wrap?

 

Jeff Roach (29:45):

 

Well, just a reminder for you know, investors to consider the case that things might still be choppy, right? As you're talking about earnings expectations still adjusting as well as economic surprise index. Don't be surprised with a little bit of that choppiness we're seeing in markets.

 

Jeff Buchbinder (30:03):

 

Yeah, historically, the economic surprise index has correlated well with earnings beats and misses. So that's why I highlighted that. And sure, it's not going to be an easy quarter. You know, and certainly the next few quarters, as you know, we think the economy's going to slow. And you put that together with maybe the low hanging fruit of cost pressures has already been picked, you know, sort of easing inflation, benefiting the cost side, cooling labor market benefiting the cost side, maybe it just might get a little bit tougher. We're out of the earnings recession. We'll probably grow earnings five plus percent this year. But it's just not a layup. It's still a tough environment. And that's why we think this year maybe we'll be more of a grind, you know, consistent with maturing bull markets.

 

Jeff Buchbinder (30:56):

 

A little bit of a bumpy ride, but still, again up mid-single digits, maybe mid to high single digits for the year. So thanks for bringing that up, Jeff. We always like to sort of connect, you know, the fundamentals and the economic data with what we think it means for markets, of course. So we'll go ahead and wrap there. Thanks everybody for joining as always. It's great to be back with you again for another edition of LPL Market Signals. I'm especially pleased that I'm able to record this in my home office and not from a hotel somewhere stuck in the Nor’easter that we just had up in Boston, which I had to drive through, unfortunately <laugh> on Sunday. So with that everybody have a wonderful week. Jeff, thanks for joining, appreciate your insights, you know, on the job situation, China earnings, everything else. Always great to be with you. Have a great week everybody, and we'll talk to you next week.