Monthly economic and market review: January 2024

“As January goes, so goes the year” is a market expression that has been around for over 50 years. The so-called “January barometer” was originally coined in the early seventies to reflect the belief that the direction of the S&P 500 index in January indicates the direction of the market for the entire year. This is different to the seasonal “January effect” which suggests that shares do well in January because loss-making holdings sold out by investors in December for tax reasons (in the US) are bought back in January. There is probably more evidence to support the notion of a January barometer than a January effect but both should be considered more out of interest and a bit of fun than the basis for investment decision-making. Believers in the January barometer would be pleased to see the S&P 500 up 1.6% for the month after a few shaky trading days at the start of the year (see the green line in the one-year chart below). The broad US index notched up several all-time high closes towards the end of the month before retreating modestly right at the end. The local equity market on the other hand, had a less than auspicious start, falling just under 7% in the first half of January (the blue line) before recovering modestly by 4% in the final fortnight to be down 3.0% for the month.

FTSE/JSE All Share index (blue, RHS) and S&P 500 index (green, LHS): 12 months to 31 Jan 24

Last year, the January barometer was on song for both the local and US markets. The S&P traded up 6.2% in January 2023 and closed the year up 24.2% while the JSE rose 8.8% in January 2023 and closed the year 5.3% higher. In 2022 the S&P lost 5.3% in January and was down 19.4% for the year – evidence of the January barometer but not the January effect. There was not much in it for the JSE in 2022 with the FTSE/JSE All Share index up 0.8% in January but down 0.9% for the year (a barometer breakdown).

The 2024 trading year began as the 2023 one ended, with markets firmly focused on forecasting when interest rates in the US will finally start coming down. Every economic indicator release that has a bearing on the interest rate narrative continues to be scrutinised and dissected for any hint of a change to the expected start of monetary policy relaxation. Strong labour market reports, stubborn inflation (by all the different measures) and hawkish Federal Reserve speak all push out rate cut expectations, strengthen the dollar and weaken the equity market. In turn, any suggestion of declining underlying inflation, a weakening economy or any small concession by a Federal Reserve Bank governor is met with a weakened dollar and stronger bond, equity and commodity markets. After rising from 0.25% in March 2022 to 5.50% in July 2023, the target of the Federal Funds rate has remained at its expected peak for half a year now. The SARB moved a little earlier than the Fed with a hike in the repo rate in November 2021 from 3.50% to 3.75% but has been on hold since its last hike to 8.25% in May 2023. While expectations of the timing of the first rate cut in the US have fluctuated, the general direction of travel for interest rates has not changed. By end-January, the markets were factoring in 140 basis points (“bp”) of cuts in the US and 100bp in each of the UK and Europe. At the South African Reserve Bank’s (“SARB’s”) January meeting, the governor noted that the central bank’s Quarterly Projection Model was pointing to 75bp of cuts in calendar 2024. Although rates will be cut in all these regions this year, the likelihood is that most of the policy relaxation will take place in the second half of the year.

The table above reflects the movement of a number of key economic and market indicators in January. The US dollar modestly strengthened in the month from $1.10/€ to $1.09/€ with the rand weakening against the US dollar and pound sterling but remaining flat against the euro. 10-year bond yields in the US and SA ticked up very modestly with local headline inflation falling from 5.5% to 5.1% and the US CPI moving off its recent low of 3.1% to 3.4%. The US CPI touched a low of 3.0% in June 2023 after previously having been that low in March 2021 on the way to a June 2022 peak of 9.1%.

The modestly stronger dollar left gold and platinum group metals prices marginally lower, with bulk commodity prices and base metals prices also mostly lower. Oil prices bucked the trend and ticked up a few dollars a barrel on renewed geopolitical tensions and fears of potential supply disruptions.

The table below reflects some of the JSE’s biggest winners and losers in the month of January. Most noticeable is the weakness in the materials counters with 13 of the 15 biggest losers in the month coming from the resources/materials sector (the other two of the 15 being telecommunications stocks MTN and Vodacom - with Telkom also making the list of top 20 decliners). The big gainers in the month included a number of listed-property stocks but generally the winners were driven by company-specific news.

Fortress Real Estate topped the gainers list after shareholders finally voted to collapse the “A” and “B” share structure into a single shareholder entity. Richemont gained on its own strong Q3 sales report (+8% y/y) but also on strong results posted by global luxury goods peers. Mr Price’s trading update for the 13 weeks ended 30 Dec 2023 (+9.9% y/y) released on 25 January were also very well received by the market and pushed that share up into the top tier of the winners list.

Tesla was one of the three “Magnificent Seven” stocks to report earnings in January. The share began sliding early in the month on disappointing production numbers but dipped well below $200 per share at the end of the month after posting disappointing Q4 2023 results and a weak outlook for the year ahead. The other two of the “Mag 7” to report results in January were Microsoft (+5.8%) and Alphabet (+0.6%).

 Boeing shares lost significant ground in the month after an Alaska Arline’s Boeing 737 Max 9 lost a piece of its fuselage as an emergency exit door plug blew out in flight. This followed the two-year grounding of the 737 Max 8 fleet around the world following two crashes of the type in 2018 and 2019. Questions were once again asked around profits over safety at Boeing and the share closed 19% lower in January. The company now has a long road to restoring its credibility with airlines, passengers and investors.

Nvidia found itself up 24.2% in the month after a 239% gain in 2023 (Q4 results are to be published on 21 Feb). The artificial intelligence theme continued its market prominence and semiconductor stocks including AMD had an extraordinarily strong month. Intel was excluded from the party after posting results on 25 January that disappointed the market and which saw the share fall almost 12% on the day. Streaming service Netflix had an incredibly positive share price response after posting a strong increase in subscribers as their password-sharing crackdown gained traction and their new subscription offering with advertising found significant favour. “Mag 7” companies Amazon, Meta and Apple were slated to report earnings on 1 February.

The health of equity markets over the remainder of the year will rest on the market interpretation of economic news as well as on published company results and their associated management outlooks and guidance. US market valuations are currently higher than historical five- and 10-year averages but have been driven by a handful of marvellous, glorious, and magnificent stocks. The Artificial Intelligence (“AI”) boom that has fired up markets and imaginations has drawn comparisons with the heady dot-com market era of 1999-2000 and we know how that all ended in tears. Selling your company or product as having generative AI capabilities has been likened to adding a “.com” to your name back in the day to increase the value of your company or product (tech-related or not). The warnings cannot be ignored and we learned long ago that we should use the words “this time is different” rather sparingly.

However, looking at mega capitalisation companies such as the magnificent seven and others, most are growing earnings at a phenomenal rate. That pace of earnings growth cannot be sustained forever, but they are strongly growing revenues from sales of physical goods such as computer chips, extreme ultraviolet lithography machines, virtual and augmented reality headsets and other technological marvels. The demand for cloud computing and hosting services is only increasing as companies opt for cheaper and safer third-party technology solutions rather than bear all of the risks and costs of their own IT setup. The swing to software as a service with an annual subscription fee as opposed to a once-off software product purchase has also opened the way to greater and more recurring revenue streams. These companies are generating substantial revenue and profits with significant reinvestment into the business, ongoing research and development, share buybacks and dividend payments.

Caution remains warranted as technology advances and takes the markets along for the ride. Even the companies with the most substantial competitive advantage may exhibit cyclical tendencies through times of fluctuating economic and market conditions. The longer-term prospects for Tesla, for example, lie more in their battery and energy technology and their self-driving car abilities than perhaps mere sales of electronic vehicles as an automaker. Tesla’s share price was knocked back sharply in January as the market became disillusioned with vehicle sales and the company’s guidance over the short to medium term. Nevertheless, the benefits to the company of its developing technologies may accrue in fits and starts over an extended period of time. Over the longer-term it is probably better to stay invested in those companies through their individual cycles and cloudy patches just as it is better to stay invested in the market over the longer-term rather than trading in and out in a foolish attempt to try and pick peaks and troughs. Markets may exhibit trends such as the January barometer from time to time but investors can never ever take the market for granted.