Celebrating Prosperity in the Markets
Historically, a strong performance in January has often signaled a promising year ahead for the stock market. This observation, known as the January Barometer, was first identified by Yale Hirsch, the founder of the Stock Trader's Almanac, in 1972. The adage, "As goes January, so goes the year," seems to be holding true for the U.S. stock market in 2024, which has seen an impressive start. Factors such as economic optimism, reduced interest rates, and burgeoning excitement around artificial intelligence (AI) have all contributed. The S&P 500 has enjoyed a leap of over 10% in the first quarter, its most notable gain for this period since 2019. This uptick is largely attributed to investor belief in a gentle economic deceleration—avoiding a steep downturn while keeping inflation in check. BofA Global Research reports that nearly two-thirds of fund managers are predicting this "soft landing," with a scant 11% bracing for a "hard landing." The strong quarterly earnings, buoyed by increased margins and reduced operating costs, explain these optimistic outcomes.
The Federal Reserve's recent leniency, coupled with promises of interest rate cuts and an improved economic forecast, has further stoked investor confidence. Even as Treasury yields have risen, a scenario that typically challenges stocks, the market has flourished. The 10-year Treasury yield now stands at approximately 4.2%, a climb from 3.86% at the year's end.
The question arises: Can this positive momentum be sustained, supporting a bullish stance on U.S. stocks? The answer leans toward yes, given a conducive environment for risk-taking, an increase in risk appetite across various sectors driven by AI adoption, and reassurance from the Federal Reserve alongside subsiding inflation rates.
However, the rise in stock valuations, especially with the S&P 500's forward price-to-earnings ratio hitting a two-year peak, merits attention. The "Magnificent Seven" major companies have largely fueled this surge, though their 2024 performances vary. Nvidia has excelled with its AI technology, while Meta Platforms has thrived, even issuing its first dividend. On the other hand, Apple and Tesla have encountered hurdles, with Apple grappling with operational challenges in China and regulatory scrutiny, and Tesla facing demand concerns. This divergence hints at a shift, with not all "Magnificent Seven" stocks moving in unison.
Despite these variances, these major players continue to significantly impact the S&P 500's progress, albeit with a reduced share compared to the previous year, indicating a move towards market-wide diversification. This diversification is visible as sectors beyond Big Tech, such as energy, financials, and industrials, outperform the broader market. This trend towards variety not only bolsters the market's strength but also aligns with what analysts like to see: a comparison shows the TSX's strong performance mirroring that of the S&P 500.
The landscape suggests a pivot away from a sole reliance on tech giants towards broader market opportunities, especially as lower interest rates are anticipated later in the year. The AI sector, with Nvidia at the forefront, continues to attract investment, yet other tech companies and chipmakers are also gaining traction, reflecting a widespread enthusiasm for AI technologies.
The question remains on how extensively the market's broadening impacts beyond U.S. borders. Despite potential benefits from a robust U.S. economy, sectors like commodities and financials limit Canada's reach. Meanwhile, the Eurozone faces recessionary pressures, and China's post-COVID recovery lags. Yet, history advises against underestimating the U.S. market, especially in an election year. With 19 out of 23 election years since the S&P 500's inception showing positive returns, the markets are expected to remain vibrant, albeit potentially volatile.
