Why stocks are falling to start the new year
It's early 2024 and stocks are already down.
The Nasdaq Composite (^IXIC) had its fourth-worst first day of a new year ever. The Russell 2000 (^RUT), a darling of the recent market rally, just had its third-worst two-day start to a year ever.
The famed Santa Claus Rally, simply put, didn't arrive.
"It's fair to say that financial markets have started 2024 with something of a mild hangover," Capital Economics deputy chief markets economist Jonas Goltermann wrote in a research note Wednesday.
Goltermann pointed out that after a roaring rally that saw stocks close 2023 near record highs, some version of a correction isn't abnormal. Other key areas that could be weighing on stocks: uneasiness around Federal Reserve policy and growing concerns about how unrest on the Red Sea could disrupt supply chains and, potentially, be an issue for inflation's path downward.
Invesco chief global market strategist Kristina Hooper points out that while the market has excitedly priced in a Fed pivot to easing monetary policy, the central bank hasn't actually made that call.
"We're going to naturally have jitters, as we wait for the true policy pivot," Hooper told Yahoo Finance Live. "To me, this is a pretty short-term blip."
Fundstrat head of global research Tom Lee, known as one of the most bullish strategists on Wall Street, flagged last Friday that a pullback early in the year wouldn't be a surprise. A key part of his reasoning was also that the Fed pivot hasn't fully occurred yet.
He believes that at some point leading into the March Fed meeting, markets could get “itchy” waiting for the first Fed cut, while the Fed itself remains "uncertain" when that will come.
This has played out in fed funds futures markets in the first few trading days of the new year. After the latest minutes from the December Fed meeting didn't reveal discussion of when interest cuts might start, bets on a March rate cut have scaled back.
Markets are now pricing in a 64% chance of a Fed rate cut in March, per the CME FedWatch Tool. A week ago, a roughly 87% chance of a cut had been priced in.
This has been a key sticking point for Wall Street bulls who see positive earnings as the key driver for stocks next year — not macro trends like speculation about Fed policy.
"Quite frankly, I don't care about the fed funds futures because they've been wrong, wrong, wrong," BMO capital markets chief investment strategist Brian Belski, who sees the S&P 500 finishing 2024 up almost 10% from current levels, told Yahoo Finance Live in December. "People have been so macro and quantitatively driven the last, let's say, three, four years. And they've been wrong."
And, to the bulls' credit, the current projections for earnings in 2024 are quite good. Recent data from FactSet shows analysts expect S&P 500 companies to report earnings growth of 11.7% for the full year, which would be above the 10-year average annual earnings growth rate of 8.4%.
That's one reason why Bank of America predicts nearly a 10% rise for the S&P 500 from current levels. "Earnings season, starting next week, is gonna be key to the market," said BofA equity strategist Ohsung Kwon.
With companies officially exiting the earnings recession in the third quarter, Kwon believes that momentum continuing is crucial to the bullish thesis.
"Companies have cut costs throughout the earnings recession," Kwon said. "They have managed margins. Margins went up for the second straight quarter. So I think the momentum is to the upside and if companies talk more positively this earning season, given that the rate pressure and the macro uncertainty has eased somewhat. Now, that's going to be bullish for equities."
Josh Schafer is a reporter for Yahoo Finance.
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