Fri, January 5, 2024 | 2:07PM ET

INTRADAY ALERT: Solid Dec Jobs report adds concerns Fed "higher for longer" and adds to misery of early 2024. Just a reminder 1H24 is likely tough.

Name: FS Insight
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Tom Lee, CFA ^AC

Head of Research

INTRADAY ALERT: Solid Dec Jobs report adds concerns Fed higher for longer and adds to misery of early 2024. Just a reminder 1H24 is likely tough.

The first 4 trading days of 2024 have been a terrible start for equities with S&P 500 (SPY) down -1.6% and the Russell 2000 (small-caps, IWM) down -3.5%. As our members are aware, for the last few years (the case for longer), the year tends to play out in January. Meaning, this turmoil in the first week of trading is telling us to brace for a challenging year. We still see S&P 500 rising to 5,200 by YE 2024, but as we noted in our 2024 Year Ahead, we believe stocks will be trickier in 1H24 and the bulk of gains are realized in 2H24.

The list of concerns in the first week of 2024 is large but here are some notables:
– Dec FOMC minutes show a Fed that might be slower to cut rates
– as noted multiple times recently, we expect markets to get “itchy” about cuts
– hence, chance for stocks to be soft until this framework is clear
– recent incoming data shows economic resilience (claims, jobs report)
– raising concerns Fed may not be in a rush to cut rates in line with market expectations
– blockade in Middle East raises marginal concerns of pickup in inflation
– interest rates have crept up since Dec 27, pressuring equities
– VIX has crept up since Dec 27, pressuring equities
Seasonal concerns also come into play:
– Santa Claus rally failed (5 last days of Dec plus first 2 days of Jan)
– Stocks down -1.6% in first 4 days of 2024 and 5th day is Monday
– More positive outcome is positive Santa Claus rally and positive first 5 days
What is this telling us about 2024? This reveals that 2024 will be a challenging year for markets, but we expect stocks to ultimately rally strongly in 2H24:
– incoming data shows the economy with remarkable resilience
– less about “hard landing” and more “soft or no landing” which is better base case
– despite what is a strong Dec payrolls report (+216k vs +170k consensus)
– trend in labor market is softening as seen in payrolls trends past year
– both ISM manufacturing and ISM services show a weakening of employment
– this leads hard data like payrolls, despite what looks like strong labor
– EPS growth is set to improve over the course of 2024 and 3Q23 EPS ex-Energy was >10% YoY
– investors are beginning to allocate back into risk assets
– BofA data shows a notable inflow into investment grade bonds

BOTTOM LINE: A tough start to 2024, and reminds us 2024 will be challenging but ultimately positive

While this is not a fun start to 2024, keep in mind the 9 building tailwinds in 2024. The most notable is the Fed has made a pivot.

Inflation is set to fall throughout 2024, although progress here will not be a straight line
Mortgage rates will fall, even if rates are rising near-term
There is a lot of pent-up demand in housing and capex and we see a capex cycle in 2024
Global growth is set to improve and global inflation reports this week show solid progress
Investors are likely to allocate back towards risk assets as evidence by the inflows into equities and investment grade bonds
The S&P 500 P/E ex-FAANG is 15.3X 2025 EPS, hardly demanding

We like the following in 2024, despite a rocky start:

Small-caps IWM
Large-cap Financials XLF KRE
Industrials XLI
Technology/FAANG QQQ

Other years had a similar rough start and ended with strong gains, so don’t be too negative.

recent examples are 1980, 1985, 1991 and 2014. All ended up with >10% gains for full year

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