All aboard the momentum train! The U.S. stock market, led by top techs, continued its winning ways from 2023 at the start of this year. The Nasdaq, Dow and S&P 500 all rose more than 1% during January.
Growth stocks remain in fashion. Large-cap growth mutual funds were the top-performing category for equity funds, according to Lipper, rising more than 3%.
What's more, the iShares MSCI USA Momentum Factor, CastleArk Large Growth and Harbor Long-Term Growers exchange traded funds were the best-performing U.S. diversified ETFs in January, according to Morningstar Direct. These three funds all gained 4% to 6%.
What do those funds have in common? Companies like Microsoft, Apple, Nvidia and Google owner Alphabet are top holdings. In other words, investors don't seem to be tiring of the Magnificent Seven trade just yet ... with perhaps the notable exception of Tesla, which plunged 25% in January due to EV price cuts amid growing concerns of increased competition in the U.S. and China.
What's Next For The Stock Market?
Will the stock market rally finally broaden out? So far in February, giant techs are continuing to prosper. Amazon.com and Facebook owner Meta Platforms each soared after reporting strong earnings. Meta even initiated a quarterly dividend. But smaller U.S. companies, which actually did rally at the end of 2023, took a back seat to the megacaps again in January. The Russell 2000 tumbled nearly 4% in the first month of 2024.
"It's a bifurcated market. Tech and AI plays are soaring and everything else is moseying along," said Garrett DeSimone, head of quantitative research at OptionMetrics.
Investors are also wondering if the Federal Reserve will nip the nascent 2024 rally in the bud. All the major indexes fell on the last day of January after Federal Reserve Chairman Jerome Powell threw cold water on the notion that the central bank might cut interest rates at its March meeting.
The Fed is still worried about inflation, even as pricing pressures have eased. The blowout January jobs numbers may mean that the Fed's rate pause could last longer as well. That could be bad news for stocks in the near term.
"As jobs remain strong and inflation remains stubborn, the Fed may keep holding and the market rally could stall out," said Sandy Villere III, portfolio manager with Villere & Co. He said that investors may have a better opportunity to buy stocks later in the year, once the Fed actually starts cutting rates.
Finding The Bright Side
The good news, though? Villere thinks investors will be able to profit from a broadening out of the rally. He said that small caps and value stocks should begin to perform better as it becomes clear that the U.S. might not stumble into an imminent recession. "We'd rather own value than follow the herd into expensive growth stocks," Villere said.
Julia Hermann, global market strategist with New York Life Investments, also thinks there are still good values in the stock market, especially if investors start looking beyond tech.
"Some investors may have felt they missed the boat, but there are plenty of opportunities ahead," Hermann said. She conceded that "valuations are reaching a little bit and difficult to justify in some parts of the market." But Hermann added that now, more than ever, is a good time to "stay diversified" and look for quality companies in a variety of industries.
Picking And Choosing In The Stock Market
Being selective could be the key to success for the rest of 2024. But this also may not be the best time to try to be a hero and buy dips in the market. A cautious and patient approach may pay more dividends, especially with the S&P 500 trading around 20 times earnings estimates for the next 12 months, which is above historical averages.
"Stocks are not cheap. We have not been big buyers lately," said Michael Cuggino, president and portfolio manager with the Permanent Portfolio Family of Funds. "We've been riding our positions because they've worked, but valuations are not as compelling."
Cuggino likes oil and energy stocks, financials and semiconductor names in the tech sector. His rationale? These companies should still benefit even as inflation cools and the Fed (eventually) cuts rates since they have decent pricing power.
He likes commodities such as gold, silver, copper and lithium as well. Gold and silver could rally as the Fed lowers rates and investors look for alternatives to bonds and the U.S. dollar. And copper and lithium stand to benefit over the long haul from continued strong global demand for electric vehicles.
Prepping For The Future Stock Market
Cuggino also thinks investors should expect more good economic data, which should keep earnings momentum going. All the headlines about job cuts in the tech and media industries may be noise that investors should ignore. Other parts of the economy are proving to be far more resilient.
"This is the most telegraphed recession we ever had, but the economy keeps surprising us," Cuggino said. "Layoffs are not enough to change the job dynamic. Wages keep going up and even though companies are streamlining, it's not having an effect on the overall unemployment rate."
Sure, some skeptical investors may be waiting for the proverbial shoe to drop for the economy and corporate earnings. But Andy Galewski, senior vice president of private wealth management at UBS, argues that because inflation pressures are fading and the job market remains strong, stock valuations could go up.
Galewski says it's reasonable to expect stocks to trade 25 times forward earnings for the S&P 500 based on the current economic backdrop. In particular, he likes energy firms and consumer staples, household brand names that tend to pay big dividends.
The fact that the major indexes are all at or near record highs and hitting new milestones (the S&P 500 has inched closer to 5,000 for example) doesn't mean a bear market or crash is imminent.
"When stocks keep hitting highs, there is a tendency to think we will get a retreat. But things have been stable," Galewski said.
