A Strong Start to the Year
“Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.” — Winston Churchill
- The S&P 500 was up in both January and February for the first time since 2019.
- Historically, gains during the first two months of the year have suggested above-average strength for the rest of the year and over the next 12 months.
- The economy continues to appear in good shape.
- The numbers suggest the slight near-term lift in inflation is a bump, not a new surge higher.
- Real incomes continue to climb, which remains a key source of support in the U.S.’s consumer-driven economy.
So much for February being a historically weak month. The amazing bull market continued, and the S&P 500 closed higher in both January and February. We noted that a higher January tends to suggest future strength. Well, things get even better when the first two months are higher. To start, here’s what typically happens after a positive January.
After the S&P 500 gained in both January and February (as it just did) the following 12 months have been higher an amazing 27 out of 28 times! The final 10 months of the year were higher 26 out of 28 times. And returns in both cases were much better than average.
The S&P 500 was up 19.9% overall in years during which both January and February ended higher, as the chart below shows, thanks in part to the head start. We aren’t expecting 20% gains this year, but we wouldn’t complain!
Lastly, the first two months of 2024 are continuing a rally that began in the final two months of 2023. We found 14 other times stocks were higher in November, December, January, and February and also for the full calendar year (2023 for the current case). The average return for those years was 21.2%.
At Carson, we have been overweight equities since late 2022. It wasn’t very popular this time a year ago to say stocks were going higher and a recession wasn’t happening — few were. Today, we see few reasons to change our bullish outlook, and January and February’s results have added to the weight of evidence.
More Signs the Economy Is Holding Up
Looking Under the Hood at Inflation
On Thursday, we received inflation data from the Personal Consumption Expenditure Index (PCE), the Federal Reserve’s preferred metric of inflation. There was a spike in inflation in January, mostly on the services side. But there’s good reason to believe this is a one-off seasonality effect, which will ease over the next few months. Overall, inflation is easing. Core PCE inflation, which strips out volatile food and energy components, has run at a 2.5% annualized rate over the last three months and a 2.6% annualized rate over the last six months. One year ago, these metrics were running around 5%, so the January spike in inflation data is likely just a bump in the downward trend.
A significant reason to be skeptical of another inflation surge is what we’re seeing in the labor market. For one, wage growth is not accelerating. The Employment Cost Index (ECI), which is considered the gold standard of wage growth measures, continues to decelerate. As of the fourth quarter of 2023, ECI for private sector workers was running at an annualized pace of 3.7%, well below peak levels in 2022 to early 2023. It’s only slightly elevated relative to the 2017-2019 average of 2.9%. Nevertheless, the downtrend in wage growth suggests the January inflation spike is not the beginning of an uptrend.
Another sign that a burst of wage growth (and inflation) is unlikely is the rate at which workers are quitting their jobs has fallen significantly over the last year. As a percentage of the workforce, the number of workers quitting their jobs is now at 2.4%, well below where it was a year ago and even lower than it was pre-pandemic. Lower turnover implies the labor market is not as hot as it was and validates the wage growth data.
As noted above, wage growth is still elevated relative to where it was pre-pandemic. That’s not necessarily a bad thing. Inflation can remain muted if productivity is running strong, and we’ve seen some evidence of that. Over the last three quarters, productivity growth has run at an annualized pace of 3.9%, the strongest pace outside of recessions since the late 1990s. (Labor productivity artificially goes up during recessions and their immediate aftermath, as the same level of output is generated by fewer workers.) The lower quit rate is likely even boosting productivity, as workers often become better at their jobs when they stay with them for longer periods.
Ultimately, what matters for an economy that runs mostly on consumption is inflation-adjusted income growth. Relatively strong wage growth combined with decelerating inflation means real incomes are growing. Along with the latest PCE inflation data, the government also released personal income data, which perhaps got less attention than it deserved. Over the last three months, real incomes excluding transfers (like Social Security) are running at an annualized pace of 4.2%. For perspective, it was running at 2.6% across 2018-2019. Overall, the economy continues to be doing just fine.
This newsletter was written and produced by CWM, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The views stated in this letter are not necessarily the opinion of any other named entity and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.
S&P 500 – A capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The NASDAQ 100 Index is a stock index of the 100 largest companies by market capitalization traded on NASDAQ Stock Market. The NASDAQ 100 Index includes publicly-traded companies from most sectors in the global economy, the major exception being financial services.
A diversified portfolio does not assure a profit or protect against loss in a declining market.
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