January 2024 Monthly Market Review

Global equity markets experienced sustained positive momentum in January, with domestic equity markets posting gains and the S&P 500 achieving all-time highs.  However, concerns about increased market volatility and cautious Federal Reserve indications regarding delayed interest rate cuts could temper investor sentiment.

Globally, Japan’s equity market stood out, driven by an improving economy and supportive monetary policy, while emerging markets (EM) faced headwinds, particularly in China due to policy uncertainties and financial market challenges.

In fixed income, the yield curve steepened, reflecting diverging expectations for short and long-term interest rates, amidst a backdrop of mixed corporate credit spreads and significant leveraged loan issuance, pointing to a nuanced and evolving investment environment.

Equities

Domestic equity markets posted their third consecutive month of positive performance.  The S&P 500 gained 1.7%, while the broader Russell 3000 Index rose 1.1%.  The S&P 500 hit all-time highs, surpassing the prior all-time high registered in January 2022.  Historically, setting a new all-time high after more than a year without one has been considered a bullish signal.  Carson Group’s data shows that 92% of the time, the S&P posted gains over the next 12 months; on average, the index recorded a 13.3% return.

However, indicators suggest that markets may face more volatility in the months ahead.   Recent market advances were driven by tech/tech-related stocks, with just three names (NVIDIA, Microsoft, and Meta) accounting for over 80% of gains in January.  Further, indications from the Fed that interest rate cuts might occur later than anticipated could dampen investor enthusiasm. Finally, with the recent market move, the S&P 500 traded at 19.8x forward earnings at month-end versus the 10-year average of 17.6x.

Strength in the U.S. dollar (USD) masked what was a positive start to the year for developed non-U.S. equities.  The MSCI EAFE Index rose 2.6% in local terms, but just 0.6% in USD.  Japan (+4.6% USD) continued its momentum, as the Nikkei hit its highest level since 1990.  Foreign investors flocked to the Japanese market on the prospect of a strengthening domestic economy, improving corporate governance, and supportive monetary policy.

While a 3.6% decline in the yen weighed on returns, it boosted Japan’s robust export sector.  Returns across Europe varied widely.  Though up just 0.1% in USD terms, the French market posted an all-time high.  Conversely, Portugal’s market declined 8.7% amidst political uncertainty and weak demand from abroad.

Emerging markets equities (−4.6%) struggled to start the year.  China (−10.6%) sold off sharply due to mounting investor frustrations with the government’s policy to support its ailing economy and financial markets.  Also, Hong Kong officials ordered the liquidation of troubled property developer, China Evergrande, after it failed to reach a restructure agreement with creditors on over $300 billion in debt.  While Beijing has signaled a commitment to prioritize stability in the wake of this news, the impact on financial markets remained uncertain.  Through month-end, Beijing had refrained from providing a large bailout package in favor of incremental support, which has been widely viewed as underwhelming.

Elsewhere, India (+2.4%) continued its strong run, benefiting from investor aversion from China and a strong macroeconomic outlook.

Fixed Income

The Federal Reserve was in a quiet period for the second half of the month, ahead of its January 30/31 meeting.  A popular notion in the marketplace was that the Fed pivoted at its December meeting because the Summary of Economic Projections (SEP) suggested the potential for three rate cuts in 2024, which was one more rate cut than suggested in the September 2023 SEP.

The Fed has forecasted between three and four 25 bps rate cuts since the third quarter of 2022 so while there was a slight change between the September and December 2023 forecasts, it does not necessarily “feel” like a pivot.

The yield curve steepened in January with the front-end of the curve holding relatively stable, but the long-end seeing increases.  The yield on the 10-year U.S. Treasury rose 7 bps to 4.0% and there was a 16 bps increase in the 30-year Treasury, to 4.2%.   As a result of changes in the shape of the curve, three-month Treasury bills (+0.4%) outperformed intermediate-term Treasuries (+0.0%) and long-term Treasuries (−2.2%) in January.  In aggregate, Treasuries fell 0.3%

Corporate credit spreads were mixed.  The yield on investment-grade corporates was largely unchanged, but rising Treasury yields caused the spread to contract 3 bps to 96 bps over comparable maturity Treasuries.  High yield spreads rose 21 bps to 344 bps.  The higher carry on high yield allowed it to deliver a flat return while investment-grade corporates fell 0.2%.

Within securitized sectors, the spread on both commercial mortgage-backed securities (CMBS) and asset-backed securities (ABS) fell 13 bps and 11 bps, respectively.  This helped CMBS rise 0.7% in January, outperforming the 0.5% return of ABS and the 0.5% decline of agency mortgage-backed securities (MBS).  Rising yields at the long-end of the curve caused MBS to sell-off.

Elsewhere in credit markets, January witnessed the largest ever single-month issuance of leveraged loans in the United States.  Borrowers seized the moment after credit spreads tightened sharply in the fourth quarter, issuing roughly $140 billion in loans—nearly double the previous record of $75 billion in November 2021.  Interestingly, the vast majority of the issuance consisted of refinancing and repricing of existing loans as M&A activity remained muted, minimizing the need for new debt.

Real Assets

Real assets were down broadly in January. Global real estate declined 4.0% with U.S. REITs (−4.1%) and European REITs (−4.5%) underperforming the broader index as both central banks announced plans to hold rates steady in the near-term.  After being the only real estate sector to see gains in January, data centers (+3.0%) continued to see exceptional tailwinds driven by higher global data consumption and the growth of AI.

Telecom (−8.8%), comprising mainly cell towers, was the worst performing real estate sector and remains sensitive to interest rates in the short term. Revised rate expectations drove global infrastructure (−3.1%) lower.

Natural resource equities declined modestly (−1.9%), despite both a 4.6% increase in the price of Brent crude oil and continued strong earnings from leading energy producers.  Natural gas prices (−18.6%) slid in January as the Biden administration suspended the approval process for new liquefied natural gas export terminals. Commodities (−0.9%) were mixed while industrial metals (−1.9%) fell on ongoing concerns about the Chinese economy.

MLPs (+4.4%) delivered another strong month of performance, bring the trailing one-year return to 23.9%, due to resilient fundamentals and highly attractive yields.  Global clean energy (−10.9%) started the year poorly and fell 20.7% in 2023.  In the short term, the sector remains sensitive to interest rate expectations and some firms are still working through poorly structured deals signed in a lower rate environment. Despite recent headwinds and poor performance, medium- and long-term tailwinds for the sector remain intact.  ⬛

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