“I don't think you know how much you can do until you try.” ~ Chita Rivera (1933 - 2024)

Good evening,

This was an important week for markets, with myriad macroeconomic catalysts having their say. “We learned a lot this week,” Fundstrat Head of Research Tom Lee told us. “Our primary takeaway is that 2024 will be a challenging year, but ultimately positive — just as January had zig-zags, but ended up positive.”

To be specific, the S&P 500 ended up 1.59% for the month of January – an important signal, in Lee’s view. He and his team examined data from the past 74 years, finding 28 instances in which the prior year saw gains of 15% or more, as we just did in 2023. Of those 28 instances, January was a positive month in 13 of them. As our Chart of the Week shows, in these 13 historic analogs, the full-year return was positive 12 out of 13 times (92%), with a median full-year return at 16.3%. Remarked Lee, “This suggests that our 5,200 [year-end] target might be low. Based on this January barometer, the possible upside to our S&P 500 target could be as high as 5,500 or more.”

Head of Technical Strategy Mark Newton had similar thoughts about the year-end target for the S&P 500. In his 2024 outlook, Newton forecast a year-end target of 5,175, but this week, he admitted that “like Tom, I suspect my original target might prove low.” Addressing those with a less-than-constructive view of markets, Newton added, “Unfortunately for the bears, I don’t suspect much will come of any correction at present, and any pullback likely does not undercut former early January highs near 4802 – an important level from a wave perspective.” Looking further out, he said, “My work suggests that Treasury yields likely start a larger period of decline from March into August, which should coincide with a more broad-based stock market rally.”

Arguably the most important and most closely watched of the week’s catalysts was the Federal Open Market Committee (FOMC) meeting on January 31. Though the FOMC kept rates unchanged, Federal Reserve Chair Jerome Powell threw cold water on hopes for a March cut during the post-meeting press conference. “I don’t think it’s likely that the committee will reach a level of confidence by the time of the March meeting, to identify that March is the time to [cut rates],” he said. 

Stocks sank immediately after this statement, but Lee believes that the odds of a March cut are higher than the market reaction immediately post-FOMC meeting suggests. Lee said, “I think it’s more revealing that Powell said, ‘We feel like inflation IS coming down […] what we are trying to do is identify a place where we are really confident about inflation getting back to 2%, so that we can then BEGIN the process of dialing back the restrictive level.’”

Lee explained, “In my view, this means that the Fed is getting ready to cut, and this is a good thing. But Wednesday’s FOMC statement also tells us that the Fed and markets will continue to struggle with what that framework is.”

Newton agreed that uncertainty over the timetable for Fed rate cuts is exacerbating investors’ jitters. He observed that “there remains inconsistency as to when and how many cuts will appear” and explicitly linked this uncertainty to current market volatility. Lee’s long-term constructiveness is also tempered by near-term worries. “I see lots of technical warning signs about breadth erosion and Technology carrying most of the load,” he said. “It’s also important to note that, seasonally speaking, Equities should be entering a choppy period in February, which tends to be a worse month than January during election years.”

Lee saw encouraging signs of a market that is gaining strength. He pointed to last week’s resilience even after Tesla (TSLA 3.29% ), the eighth-largest company in the S&P 500, fell 11% in a single day, and again when stocks rebounded on Thursday from their post-FOMC slide Wednesday afternoon. He also pointed to how markets rose despite surprisingly hot jobs data released on Friday. Still, acknowledging Newton’s concerns about breadth, Lee suggested that “we should be somewhat wary right now.”

On Earnings

This was arguably the busiest week of the 4Q23 earnings season. We saw earnings reports from bellwether companies such as Amazon (AMZN 0.27% ), Apple (AAPL 0.62% ), and Meta (META 0.75% ), and, in Lee’s view, they have been very good overall. With 160 companies or 32% of the S&P 500 reporting, we are seeing 79% of companies beating expectations by an average of 6%. “Importantly,” Lee said, “43% of S&P 500 companies are reporting earnings growth of 10% or more. This is the highest this percentage has been since 2022, and it suggests that the earnings recession is over.”

FSI Sector Allocation Strategy

These are the latest strategic sector ratings from Head of Research Tom Lee and Head of Technical Strategy Mark Newton, part of the February 2024 update to the FSI Sector Allocation Strategy. FS Insight Macro and Pro subscribers can click here for ETF recommendations, precise guidance on strategic and tactical weightings, detailed commentary, and methodology.

Elsewhere 

The International Monetary Fund revised its 2024 global economic forecast upwards, including its expectations for both the U.S. and Chinese economies. The IMF saw more of a chance of a soft landing, citing consumer resilience and faster-than-expected easing of inflation.

Toyota (TM) had to apologize for yet another scandal involving alleged testing irregularities. The company disclosed that results of performance testing for various diesel engines were falsified, affecting certain Hilux and Land Cruiser vehicles. The carmaker previously apologized for two other testing-related scandals, one involving airbag safety and the other involving emissions. 

Germany reported headline inflation falling to 2.9%, its lowest level since June 2021. Much of the decline from December’s 3.7% came from falling energy prices, though inflation for food and goods also fell. Core inflation, at 3.4%, was slightly lower than the 3.5% for December.

French farmers blocked access to Paris, parking tractors across major roadways into and out of the City of Lights. The farmers are protesting competition from lower-cost imports amidst rising costs due to several factors, including green initiatives. Similar protests by disgruntled farmers took place elsewhere in France, as well as in Belgium and Germany. 

Prominent Chinese banker Bao Fan reportedly resigned from all roles at his firm, China Renaissance Holdings, roughly a year after disappearing. Chinese authorities had recently reported that he was assisting with an investigation, but his firm announced that he was stepping down “for health reasons” and to “spend more time on his family affairs.” Bao’s whereabouts remain unknown. 

Cameroon has become the first country in the world to roll out a malaria vaccine on a wide scale. The country hopes to administer 662,000 doses of Mosquirix, (also known as RTS,S), with 19 other African countries planning to follow suit. Mosquirix was developed by GSK plc (GSK 1.08% ).

China’s securities regulator sought to put an artificial floor under the country’s sliding stock markets by suspending the lending of restricted stocks, effectively putting an end to short selling in those shares. 

[Editor's note: Publication of the Weekly Roadmap was delayed this week due to technical issues beyond our control. We apologize for the inconvenience.]