After a strong year-end run, 2024 opened with some jitters. Here’s why you should stay invested.
New Year celebrations came early, and the hangover seems to have kicked in.
The end-of-year rally was staggering. Thanks to the Fed’s pivot to signal rate cuts ahead, an economy that refused to break, and meaningful progress in inflation, 2023 marked the third best year for a global 60/40 stock/bond allocation in the last 20 years—behind just 2009 and 2019. In U.S. dollar terms, the S&P 500 boasted a 26% rally, the Stoxx Europe 600 likewise gained almost +17%, and a late comeback from bonds pushed global core fixed income to a +7.2% gain that ended a two-year losing streak.
Yet 2024 hasn’t started on the same high note, and some now worry the best gains are in the rearview mirror. Mixed economic data, questions over when and how many rate cuts might come, and growing geopolitical angst in the Middle East have all played a part. However, we think some choppiness on the heels of a strong rally is to be expected. We still believe in the constructive path forward and investing opportunities we laid out in our Outlook 2024.
Don’t fear one bad week
The end of the year brought tremendous optimism, and it’s possible markets got just a bit too excited. To be sure, the signposts for a soft landing for the economy are there: inflation across the developed world has more than halved, and growth is cooling but solid. But there are still risks, and how fervently policymakers respond with rate cuts should be guided by how the data shakes out in the coming months. Investors seem to be recalibrating and resetting their expectations for what they know today.
Tougher first weeks also aren’t necessarily a foreboding sign of a bad year. Since 1950, we’ve seen 28 other times with a negative first week, and 17 of them (over 60%) still ended the year higher. The start of any year also tends to see choppier trading. Looking at the last 30 years, January and February have seen more volatility than most other months, on average.
We see reasons to be optimistic
While there are many, we’d highlight three.
1) Strength tends to signal more strength.
At last week’s close, the S&P 500 was just 2% shy of its all-time high reached two years ago. Some worry they’ve “missed it” and question if now is really the time to get invested. But investing at an all-time high versus not hasn’t historically led to a meaningful difference in future returns.
Over the last 50 or so years, if you invested in the S&P 500 at an all-time high, your investment would have been higher a year later over 70% of the time with a median return of 12%. The difference of investing at any time (including at both records and non-records) also doesn’t make that much of a difference (with a median return of 10.5%). We don’t think today’s strong footing is reason to delay getting invested.
The chart describes the S&P 500 index level and all-time highs. The line started at 93 in 1970. It went up to a high point at 1492 in 2000. Then it went down to trough at 677 in 2009. It then went all the way up to the 4582 in 2023. The orange dots are showing the points where the S&P 500 index level reaches all-time highs at that point in time.
2) Environments like this have historically been a good time to invest.
Times like these—marked by cooling inflation, solid earnings growth and central bank easing—tend to signpost a sweet spot for stocks. For instance, inflation regimes between 2% and 3% usually see the strongest returns for the S&P 500. And we will likely also see a triumphant return to earnings growth. By Q4 this year, Street analysts anticipate S&P 500 quarterly earnings to grow at a year-over-year rate of almost 15%.
The chart shows two graphics, on top the S&P 500 annual returns in different inflation environments from 1950-2022. The bottom chart is S&P 500 Earnings Per Share (EPS) growth, year-over-year % change back to 2017. In the S&P 500 annual returns in different inflation environments chart: When inflation is >5% the average S&P 500 return was 2%. When inflation is 3-5% the average S&P 500 return was 8%. When inflation is 2-3% the average S&P 500 return was 14%. When inflation is 0-2% the average S&P 500 return was 11%. In the bottom chart showing year over year EPS growth: In Q1 2017 the quarterly year-over-year EPS growth was 14.8%. In Q4 2017 the quarterly year-over-year EPS growth was 21.4%. In Q1 2018 the quarterly year-over-year EPS growth was 24.4%. In Q4 2018 the quarterly year-over-year EPS growth was 14.7%. In Q1 2019 the quarterly year-over-year EPS growth was 0.8%. In Q4 2019 the quarterly year-over-year EPS growth was 1.5%. In Q1 2020 the quarterly year-over-year EPS growth was -14.2%. In Q4 2020 the quarterly year-over-year EPS growth was 0.8%. In Q1 2021 the quarterly year-over-year EPS growth was 27.1%. In Q4 2021 the quarterly year-over-year EPS growth was 27.7%. In Q1 2022 the quarterly year-over-year EPS growth was 12.7%. In Q4 2022 the quarterly year-over-year EPS growth was -2.8%. In Q1 2023 the quarterly year-over-year EPS growth was -3.6%. In Q4 2023 the consensus expectations for quarterly year-over-year EPS growth was 5.0%. In Q1 2024 the consensus expectations for quarterly year-over-year EPS growth was 8.5%. In Q4 2024 the consensus expectations for quarterly year-over-year EPS growth was 14.7%.
We also looked at historical Fed cutting cycles, in both soft landings and recessions. Going back to 1965, the S&P 500 typically rallies by roughly 15% on average in soft landings in the year after the first cut. What’s more, five of the 10 best years for stocks over that time have happened when the Fed was cutting rates without a recession: 1985 (+32%), 1989 (+32%), 1995 (+38%), 1998 (+29%) and 2019 (+31%).
The chart describes S&P 500 performance during Fed cutting cycles since 1965. It’s showing the S&P performance 12 months prior and after first cut. For the soft-landing average line, the first data point came in at 6% for -12 months from first cut and got to 0% for the time of first cut. It then picked up to peak at 16% for 11 months from first cut. The last data point came in a bit lower at 15% for 12 months from first cut. For the average line, the first data point came in at 4% for -12 months from first cut and got to 0% for the time of first cut. It then moderated rose and reached the peak at 7% for 12 months from first cut, which is also the last data point. For the recession average line, the first data point came in at 2% for -12 months from first cut and got to a low point at -5% for -2 months from first cut. It then went up to 0% for the time of first cut. Then it came back down to -3% for 2 months from first cut and went up again to peak at 1% for 8 months from first cut. It then came back down to -1% for 10 months from first cut. The last data point came in higher at 2% for 12 months from first cut.
3) The market may not be as expensive as you think.
The year-end surge in stocks pushed valuations higher, especially as the Magnificent 7 soared. Those seven companies ultimately accounted for 60% of the S&P 500’s 2023 return. Yet as big tech leads the start-of-year losses, some worry its ascent wasn’t sustainable and spells weakness for the broader market.
We’d note that big tech (and tech at large) already went through a major course correction in 2022, refocusing and retrenching to return to profitability in 2023. Now, as Michael Cembalest calls out in his Eye on the Market Outlook 2024, the Magnificent 7 are producing healthy cash flows at a rate that well exceeds that of the rest of the market, and profit margins are still improving. Adjusting big tech valuations for their higher long-term earnings growth expectations ahead, the market doesn’t look nearly as overpriced.
Moreover, recently battered parts of the market are actually faring well in the recent volatility: healthcare, banks, utilities and staples all outperformed last week.
You don’t need to try to time the market
Market timing can be a dangerous habit—no one has a crystal ball, and while it may feel comfortable to sit in cash, doing so could lead to missing out on opportunities to grow and compound wealth over time.
Getting invested all at once may feel daunting, especially during a tougher start to the year. Phasing in over a few months could be a powerful tool to get started. The below chart looks at the impact of one- and three-year returns for a balanced allocation since 1975, comparing the experience of investing immediately versus phasing in over six or 12 months.
Because stock and bond markets tend to rise over time, deploying all cash upfront has usually led to the highest returns—but it comes with more variability. By comparison, phasing in diversifies against timing risk and helps mitigate drawdown risk—without giving up much by way of potential returns.
The chart shows the one and three-year returns for a balanced allocation. With no phase-in 1 year return median return is 11%, 95th percentile is 28% and 5th percentile is -8%. With no phase-in 3 year return median return is 11%, 95th percentile is 20% and 5th percentile is -2%. With 6-month phase-in 1 year return median return is 9%, 95th percentile is 23% and 5th percentile is -6%. With 6-month phase-in 3 year return median return is 10%, 95th percentile is 20% and 5th percentile is -2%. With 12-month phase-in 1 year return median return is 6%, 95th percentile is 16% and 5th percentile is -2%. With 12-month phase-in 3 year return median return is 9%, 95th percentile is 18% and 5th percentile is -1%.
In the end, making a plan is the most important step. Your J.P. Morgan team is here to think through your portfolio for the year ahead.
All market and economic data as of January 2023 and sourced from Bloomberg Finance L.P. and FactSet unless otherwise stated.
We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. Opinions, estimates, and investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice.
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