Our Top Market Takeaways for January 12, 2024.

The new year has brought new challenges on the heels of 2023’s might and this has sowed seeds of doubt in the rally.

Some worry that the inflation problem could stage a return (especially as the Federal Reserve turns to rate cuts), or that recession talk could re-emerge. Others are growing more concerned about tensions in the Middle East. Or some simply seem anxious because they think all of the good news might already be accounted for.

All are valid worries – and risks. Yet, as we dig deeper into these dynamics, we still see promise for the year ahead.

Disinflation has more room to run

Inflation has made a lot of progress: For the first time since 2021, this week’s Consumer Price Index (CPI) print showed that both headline and core prices (stripping out food and energy) are running below a 4% annual pace. But the read was also a touch hotter than what economists expected. 

We see three key reasons why inflation can keep moving toward the Fed’s 2% target.

1) Shelter prices: Think: your rent, or the equivalent of what you’d pay to rent your home instead of owning it. This segment contributed over half of the year-over-year (YoY) increase in headline CPI in December (and over two-thirds of core). Stripping it out, core prices actually ran at a 2.2% YoY pace. Leading indicators point to meaningful progress ahead – from reads on new leases being inked to a burgeoning supply of new multi-family homes coming to market.

2) The labor market: It’s strong, but most measures are back to where they were before the pandemic. New job openings recently fell to their lowest since 2021, and Americans signaled they’re less likely than before to quit their jobs in search of new ones. That’s good news for sticky wage growth.

3) Supply chains: Most gauges of supply chains have now normalized after unprecedented COVID-era disruption. The situation in the Red Sea, and the Middle East broadly, warrants monitoring. But so far, the pickup in global shipping costs and oil prices looks modest, and it hasn’t stretched into other areas of the economy or markets.

Finally, other measures of broad inflation are already showing more powerful signs of cooling. The measure the Fed looks at – core Personal Consumption Expenditures (PCE) – has actually been running at a 1.9% annualized rate over the last six months. We expect some bumps along the road of continued progress, but overall, the trend is still promising.

We don’t think all the good news is priced in

While 2024 follows one of the best years that markets have had in the last two decades, we think the gains can continue. Here are three reasons why.

1) Soft landings tend to signal pretty strong returns for both stocks and bonds.

It’s true most expect a soft landing, but we’d note that typical Fed cutting cycles in environments such as this one tend to see even stronger returns than we expect. Compared to history, the rally is actually about what you’d expect so far – and it signals the gains can keep coming.

Looking at hiking/cutting cycles going back to 1965, soft landings have seen the S&P 500 rally about 30% on average between the last hike and the last cut, and 10-year Treasury yields fall by roughly 200 basis points. By comparison, stocks have rallied just 5% since the Fed’s final hike this past July.

2) Earnings growth is just getting going. The strength of that matters.

While economic growth has been solid and stands to cool overall, recently battered sectors (i.e., manufacturing, housing and semiconductors) are stabilizing – and by some measures, recovering.

That jibes with our view that last year’s correction in earnings – which rolled across different sectors at different times – is staging a recovery. After refocusing, cutting costs, and scaling their businesses, many companies are just in the nascent stages of returning to profitability. For instance, Q4 2022 marked a low point – 68% of S&P 500 sectors by market cap were struggling with negative earnings growth. Now, the imminent Q4 season should see just over 80% with positive earnings growth. This rises to 100% by Q3 2024. Indeed, earnings expectations for the next 12 months just hit a fresh all-time high.

This last point is an important one. Companies seem to be operating more efficiently now. For instance, during the Q3 earnings season, just over 60% of companies beat revenue estimates. Even better: 80% beat on earnings. Similarly, profit margins have now stabilized at pre-COVID levels. All in all, this suggests companies are using their costs effectively to generate sales – a good sign for future profitability. This Q4 season should offer more insight.

3) Not everything is accounting for a soft landing.

While we see more broad market upside, we’d note some of the most cyclical and value-oriented pockets of the market don’t fully appreciate the shift in the economic landscape. Small and mid-cap companies, as well as regional banks, are still lagging the broader market. To us, this signals a soft landing isn’t fully appreciated. That’s supportive for a more robust, wider rally than the tech-dominated climb of 2023.

Focus is key

Every day brings new headlines, and new challenges. In unpacking the facts and distilling the data, we still see compelling returns ahead for multi-asset investors. This year may yet see volatility as investors confront upcoming catalysts, but we don’t think it should derail your plans. For long-term investors, time in the market and diversification can help reduce uncertainty.

Your J.P. Morgan advisor is here to think through your portfolio for the year ahead.

All market and economic data as of 01/12/2024 are sourced from Bloomberg Finance L.P. and FactSet unless otherwise stated.

DISCLOSURES

Index definitions:

The S&P 500 Index is widely regarded as the best single gauge of large-cap U.S. equities and serves as the foundation for a wide range of investment products. The index includes 500 leading U.S. companies and captures approximately 80% coverage of available market capitalization.

The MSCI World Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets. The index consists of 23 developed market country indexes.

The Bloomberg Global Aggregate Bond is a flagship measure of global investment grade debt from a multitude local currency markets. This multi-currency benchmark includes Treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers.

The Bloomberg U.S. Corporate High Yield Bond Index measures the USD-denominated, high yield, fixed-rate corporate bond market. Securities are classified as high yield if the middle rating of Moody's, Fitch and S&P is Ba1/BB+/BB+ or below. Bonds from issuers with an emerging markets country of risk, based on Bloomberg EM country definition, are excluded.

The Bloomberg U.S. Treasury Bills (1-3M) Index tracks the market for treasury bills with 1 to 2.9999 months to maturity issued by the US government. U.S. Treasury bills are issued in fixed maturity terms of 4-, 13-, 26- and 52-weeks. 

The Bloomberg U.S. Aggregate Index is a broad-based flagship benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate pass-throughs), ABS and CMBS (agency and non-agency).

The Bloomberg Commodity Index is calculated on an excess return basis and reflects commodity futures price movements. The index rebalances annually weighted 2/3 by trading volume and 1/3 by world production and weight-caps are applied at the commodity, sector and group level for diversification. Roll period typically occurs from 6th-10th business day based on the roll schedule.

The Bloomberg Eco Surprise Index shows the degree to which economic analysts under- or over-estimate the trends in the business cycle. The surprise element is defined as the percentage difference between analyst forecasts and the published value of economic data releases.

The NASDAQ 100 Index is a basket of the 100 largest, most actively traded U.S companies listed on the NASDAQ stock exchange. The index includes companies from various industries except for the financial industry, like commercial and investment banks. These non-financial sectors include retail, biotechnology, industrial, technology, health care, and others.

The Russell 2000 Index measures small company stock market performance. The index does not include fees or expenses.

We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. Opinions, estimates, and investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice.

The views, opinions, estimates and strategies expressed herein constitutes the author's judgment based on current market conditions and are subject to change without notice, and may differ from those expressed by other areas of J.P. Morgan. This information in no way constitutes J.P. Morgan Research and should not be treated as such. You should carefully consider your needs and objectives before making any decisions. For additional guidance on how this information should be applied to your situation, you should consult your advisor.

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