As goes January...

…So what? Christmas seems forever ago, as I toil at my Florida winter abode, sitting out an impending East Coast snowstorm. As happens each year, much of the talk has been about the Santa Claus Rally and the January effect. Maybe Santa’s thunder was stolen by the extraordinary runup of late 2023. Indeed, January picked a tough time to come around this year, following a nine-week streak of gains in the S&P 500, a feat only achieved 12 times since 1960. It had to end sooner or later, and indeed it did so today. Still, if the blithe late-2023 mood is suddenly absent, there remains cause for cheer. Renaissance Macro points out that a strong rally like that in late 2023 is usually “confirmation of momentum” and not a liability. The tale will be told by the strength of consumers and companies.

Consumers need jobs. The December employment report released today was a mixed bag. On the one hand, payrolls beat, rising by 216,000 (175,000 forecast) and the unemployment rate held steady at 3.7% (increase to 3.8% forecast). However, the 3-month average (setting aside the impact of strikes) is just 160,000. Average hourly earnings rose broadly, which the Fed will notice. The labor force participation rate declined, also broadly, while underemployment ticked higher. As was the case all year, the job-finding rate declined. Renaissance Macro observes public sector job growth continuing at a breakneck pace, rising at an average of 56,000 per month in the last 12. State and local governments make up the lion’s share of these increases, but federal employment continues to swell also, rising to its highest level since 1995. A mixed bag.

Companies need profits. Here Piper Sandler cites warning signs. Payrolls keep getting revised lower (10 times in 12 months); household employment has been flat. And average weekly hours have decreased. Why are companies trying to cut costs? Because the Federal Reserve’s rate hikes are finally taking a bite out of corporate revenues. It will become increasingly important to defend profit margins, and we will be watching for clues in fourth quarter earnings reports. It takes an average of 23 months for Fed hikes to show up in the labor market, and that will be February! Although, the Fed is expected to start cutting before long! Last year the S&P 500 jumped 24.2%. Yardeni notes that in the period since 1928 the average gain in the year following a 20% rise was 5.9%. That figure increases to 9.7% with no recession versus an average loss of 10.1% if there is one. As we are in the soft-landing camp, to the January effect, I say, “So what?” 

Positives

• A labor market running in place could appease the Fed JOLTS openings fell more than expected in November vs. the month before. The ratio of vacancies to the unemployed rose to 1.40, and the labor market appears to be moderating.
• Fed keeping options wide open should tamp market melt-up In the minutes from its December meeting, the Fed “reaffirmed that it would be appropriate for policy to remain at a restrictive stance for some time until inflation was clearly moving down.” The words are broad enough to mean what the Fed eventually needs it to mean.
• Perhaps some New Year’s relief for homebuyers Mortgage rates have now declined about 100 basis points, though national surveys from realtors and homebuilders agreed that further declines to 6% would be the magic number required to jump start purchases. Meanwhile ISI’s proprietary rent survey declined due to a record increase in the supply of new apartments in 2023.

Negatives

• Services stalls The ISM Services Index fell 2.1 points in December to 50.6. This was below expectations and the lowest level since May 2020, with new orders decreasing.
• U.S. manufacturing contracts The ISM’s US Manufacturing Index rose to 47.4 in December. (Readings below 50 indicate contraction.) It was the fourteenth straight month of contraction there.
• Global manufacturing does, too The Global Manufacturing PMI declined from 49.3 to 49.0 in December, the sixteenth straight month below 50, showing that global growth remains weak.

What Else 

• If you’ve been asleep for two years, you haven’t missed much The S&P 500 rose a mere 3.4% over the period 2022-23, while the Nasdaq fell 2.3%. Per Leuthold, only Italian equities and gold outperformed cash over that time period.
• It’s no wonder cash is still king $1.15 trillion flowed into money market ETFs last year, dwarfing flows into equity ($388B) and fixed income ($207B) ETFs.  
• Better than good enough for government work On December 28 the US announced a 5.2% raise for federal employees. That’s twice 2024’s expected rate of inflation.

A fond farewell to my writer of 15 years, Steve, and welcome, John. I hope you have a sense of humor!

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