New Year Nerves: Why We’re Still Optimistic

The year 2024 hasn’t started on the same high note that 2023 ended, and some now worry the best gains are in the rearview mirror. Mixed economic data, questions over rate cuts, and growing geopolitical angst in the Middle East have all played a part. However, we think some choppiness on the heels of a strong rally is to be expected.

We see three main reasons to be optimistic:

1) Strength tends to signal more strength.

Investing at an all-time high versus not hasn’t historically led to a meaningful difference in future returns. Over the last 50 or so years, if you invested in the S&P 500 at an all-time high, your investment would have been higher a year later over 70% time with a median return of 12%. The difference of investing at any time (including at both records and nonrecords) also doesn’t make that much of a difference. We don’t think today’s strong footing is reason to delay getting invested.

2) Environments like this have historically been a good time to invest.

Times like these – cooling inflation, earnings growth and Federal Reserve easing – tend to be a signpost for a sweet spot for stocks. For instance, inflation regimes between 2% and 3% usually see the strongest returns for the S&P 500. We should also see a triumphant return to earnings growth by the fourth quarter of this year.

We also took a look at historical Fed cutting cycles, in both soft landings and recessions. Going back to 1965, the S&P 500 typically rallies by roughly 15% on average in soft landings in the year after the first cut. What’s more, five of the 10 best years for stocks over that time have happened when the Fed was cutting rates without a recession: 1985, 1989, 1995, 1998 and 2019.

3) The market may not be as expensive as you think.

The year-end surge in stocks pushed valuations higher, especially the Magnificent 7. Those seven companies ultimately accounted for 60% of the S&P 500’s 2023 return. Yet as big tech leads the start-of-year losses, some worry its ascent wasn’t sustainable and spells weakness for the broader market.

Big tech (and tech at large) already went through a major correction in 2022, refocusing and retrenching to return to profitability in 2023. Now, the Magnificent 7 are producing healthy cash flows at a rate that well exceeds that of the rest of the market, and profit margins are still improving. Adjusting big tech valuations for their higher long-term earnings growth expectations ahead, the market doesn’t look nearly as overpriced.

Rick Barragan is the Managing Director,
Los Angeles Market Manager, for J.P. Morgan Private Bank.
[email protected] | (310) 860-3658
privatebank.jpmorgan.com/los-angeles

Source: J.P. Morgan Private Bank, January 2024 New year nerves: Why we’re still optimistic By Madison Faller, J.P. Morgan Private Bank