MONTHLY MARKET MUSINGS

January 2024

Welcome to 2024  

As we have discussed over the past few months, the markets continued to rally into the end of 2023. The S&P/TSX Composite Index (TSX) and the Dow Jones Industrial Average (DJIA) have gained approximately 8.0% and 13.7%, respectively, as of the date of this writing[1]. This is a significant improvement from the weak markets of 2022 and should provide investors with a reason to celebrate and be hopeful for the year to come.

January has always garnered lots of attention because of two unique market tendencies that have been observed and followed over the years. These two occasional occurrences are referred to as the "January Effect" and the "January Barometer". The "January Effect" is the idea that there is an upward seasonal bias for stocks in January, with an emphasis on small capitalization names specifically. Many things have been cited as the reasons for this such as year-end tax-loss harvesting, enthusiasm for the new year, the investment of year-end bonuses, etc. The "January Barometer" suggests that the return in January will often dictate the course of the entire year but no one seems to have a clear reason as to why this phenomenon exists. In both cases, these variances have shown to be quite consistent in the past[2] and while the dependability has lessened over time, they are still worth acknowledging and taking into consideration when developing a view for the coming months and year.

Over the past two months we have experienced a central bank relief rally as the U.S. Federal Reserve (Fed) and the Bank of Canada (BoC) confirmed the end of the tightening cycle and also expressed that rate cuts may come sooner than initially expected. The ongoing rhetoric of a potential recession has diminished recently and many seem to be leaning now towards the soft landing argument. When we combine this shift in monetary policy which is bullish for equities with the historical seasonal strength, it supports the view of positive returns in January. Adding to this, the estimated amount in money market funds is about US$6 trillion and if even a small fraction of that flows back into equities it could propel the markets higher in the early part of 2024[3]. While risks do remain, the tailwinds in place for the equity markets seem to be pointing toward continued gains out of the gates in the new year. As it stands now, we are of the view that the early months will produce a robust start that will eventually simmer down as we near the summer and the equity markets will likely be relatively flat from that point on heading into next fall. While it is unlikely that the returns in 2024 will mirror the outsized results of 2023, we are confident in saying that we expect them to be positive and certainly better than 2022. The broader markets will likely see annual returns in the high single-digits to low double-digits in 2024. The areas of focus for next year will be the stability of inflation now that it has come down over the past year, the resilience of the U.S. job market which has remained high so far and held off a recession, and the health of the consumer. These factors play an important role in understanding how 2024 will unfold and will play a large part in the further growth of the economy which will ultimately dictate the path of equities.

JAY SMITH, CIM, FCSI

Senior Portfolio Manager & Senior Wealth Advisor          
 

BRAD BROWN, MBA, CFA
Portfolio Manager & Associate Investment Advisor