Holding Pattern

Both stocks and bonds opened modestly higher this morning, but are down a bit to start the year. The S&P 500 is off .08%, the Dow is down .3% and the Nasdaq is down .6% so far in January. Long-term Treasury bonds are down about 2%, intermediate corporate bonds are off by about .7%, and junk bonds are flat. WTI crude oil is lingering in the low $70s per barrel. Silver and gold are down between 2% and 3% so far this month.

It feels like investors are in a holding pattern after the monster year-end rally. We’re all waiting for data to either confirm those gains, or show us they were a bit presumptive. We’ll get some important inflation data tomorrow from the Bureau of Labor Statistics. And earnings season kicks off on Friday when some of the big banks report fourth quarter results. Next week we’ll get reports on consumer spending and factory orders.

The consensus view seems to be that while slowing, the economy remains resilient. Treasury Secretary Janet Yellen recently says, “What we’re seeing now I think we can describe as a soft landing.” In other words, inflation seems to have normalized without triggering a recession. What’s more, Federal Reserve officials basically agree, admitting that interest rates should probably drift lower through the course of 2024. That’s of course good news, but with the S&P 500 having rallied 14% and the US Aggregate Bond Index up over 8% during the last two months, a pause in momentum is to be expected.

Brian Belsky, BMO’s chief investment strategist, warns against short-term thinking, and specifically about reading too much into this pause in the stock rally. He says the late 2023 rally changed the investing landscape by bringing “credibility back to owning equities” and the “broadening out theme really began to happen.” That is, investors are no longer just hyper-focused on tech and the “Magnificent 7.” He believes the longer term trend is still positive.