Investment Comment
12th January 2024
Starting as we mean to go on?
Investors hoping that markets would pick up where they left off in 2023 have been frustrated with the opening trading week of 2024. A reversal of the well cited, but perhaps outdated, ‘January Effect’ has taken place as we cross over into the New Year. The January Effect is a seasonal phenomenon in financial markets where stock prices have a tendency to rise in the first month of the year. This is usually attributed to year-end tax loss harvesting which suppresses stock prices in December, resulting in investors purchasing these securities at lower prices, driving the price back up through January. Whilst a potential source of arbitrage in the early-to-mid-20th century, it is widely accepted that a meaningful relationship between the opening month of the year and consistent returns no longer exists...
S&P 500: Total Number Of Positive vs Negative January Returns
Source: Artorius, Bloomberg
…as mentioned, we have seen quite the opposite of the January Effect so far this year. Both bonds and equities markets rallied in November / December as markets declared an inflection point in the US Federal Reserve’s (Fed) current tightening cycle and moved to price in 6 interest rate cuts in 2024, starting in March.
Implied Overnight Rate and Number of Hikes/Cuts
Source: Artorius, Bloomberg. Data as at 29th December 2023.
As markets reopened last week, there was a meaningful reversal of this trend. Bond and equity prices fell as markets reassessed an overoptimistic outlook on rate cuts, marking the start of an ‘inverse January Effect’ if you will. The miserable start to 2024 is matched by only 6 previous Januarys since the turn of the century, encompassing three of the last major bear markets (2001, 2008, 2022), creating unease that we could be at the beginning of another year of that ilk.
Worst first weeks in the US equity market since 2000 and subsequent years' performance
Source: Artorius, Bloomberg
Why the lack of faith?
Whilst the first few trading days of 2024 have been undoubtedly disappointing, it would be hasty to subsequently write off 2024 as a year to forget. Instead we shall focus on why markets haven’t quite started the year as they left off the last.
Friday marked a data deluge in the US, first US non-farm payrolls, a measure of the change in the number of people in employment month-over-month. The US added 216,000 jobs in December, beating analysts’ estimates of 170,000 additions and, to further compound this, the data also revealed a reversal in the participation rate (the number of people either in employment or looking for employment as a percentage of the total civilian population). Seen as a sign of strength in the labour market, the upward surprise to job additions and the fall in the participation rate put a pin in hopes that the Fed would be able to aggressively cut policy rates sooner rather than later.
Soon after, the second raft of data was released in the form of the Institute of Supply Management’s (ISM) Purchase Managers Index (PMI), a survey index that measures business activity in the US. Most alarmingly, the number of employers expected to increase hiring rather than decrease it moderated significantly. This is seen as a sign of weakness in the labour market, and a tailwind in the hopes that the Fed would be able to aggressively cut policy rates, as a result bond yields fell.
US 10-year Treasury Yield – Friday 5th January
Source: Artorius, Bloomberg
As you were.
Friday’s data release was, therefore, a tale of two halves and whilst the 10-Year Treasury yield clearly reacted to both data prints it finished up not far from where it started. A dearth of any other significant data points and the cancelling out of two surprising yet contradicting data points, points to a market that, like many of us over the festive period, had overindulged. The New-Year rally in yields can therefore be described as a sensible rebalancing of market expectations, rather than any definitive change in expectations for the US economy. Perhaps investors should not misinterpret the early-year rise in yields (and subsequent fall in equity and bond prices) as a significant pivot in longer-term expectations on the trajectory of the economy, or in fact, that the poor start to 2024 is a prelude for the remainder of the year.
Nehemiah White Family Office Analyst
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Year-end tax loss harvesting is a strategy implemented to reduce capital gains tax liability by selling underperforming assets at a loss and using the realised loss to offset potential gains.
All expressions of opinion reflect the judgment of Artorius at 12th January 2024 and are subject to change, without notice. Information has been obtained from sources considered reliable, but we do not guarantee that the foregoing report is accurate or complete; we do not accept any liability for any errors or omissions, nor for any actions taken based on its content. The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested. Past performance is not a reliable indicator of future results. Nothing in this document is intended to be, or should be construed as, regulated advice. Artorius provides this document in good faith and for information purposes only. Reliance should not be placed on the information contained within this document when taking individual investments or strategic decisions. Artorius Wealth Management Limited is authorised and regulated by the Financial Conduct Authority. Artorius is a trading name of Artorius Wealth Management Limited.
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