Market Commentary: Slow Start For Stocks Despite Solid Job Gains


2023 Stock Gains Suggest a Solid (But Not Spectacular) 2024

The S&P 500 finally fell last week after nine consecutive weeks of gains, the longest weekly winning streak since 2004. Some investors worry the decline during the normally bullish end-of-year/early-new-year period may be sending a negative signal. But we believe stocks simply needed a breather and don’t view it as a significant warning sign. The extreme strength since late October is consistent with major bull markets, and we expect this overall upward trend to continue in 2024.

  • Stocks took a break after a nine-week win streak, but we remain bullish in 2024.
  • Can stocks do well after a year with a 20% gain? History says to expect it.
  • A “Goldilocks” December jobs report highlights sustained momentum for the economy as it continues its path to normalization.

One knock on the bull market last year was that only large-cap tech stocks were rising. Although we didn’t totally agree with this assessment, we’ve been encouraged to see small- and mid-cap stocks taking the baton lately. We expect to see wider participation in 2024 as the bull market ages, which is perfectly normal and healthy overall.

We’ve heard from many investors asking how the S&P 500 could possibly do well in 2024 after gaining more than 20% in 2023. We’d counter that by pointing out the S&P 500 hasn’t made a new all-time high for more than two years. So, although last year was quite the run, we need to remember just how bad 2022 was.

The data show intriguing trends for the years following a stock market gain of more than 20%:

  • There have been 20 previous times the S&P 500 gained at least 20%. It was higher the following year 16 times (80%) for a solid median return of 12.1%.
  • The last time the S&P gained 20% (2021), stocks moved into a bear market the following year (2022), but the nine years before that (and 10 of the last 11) markets gained after a 20% year.
  • It would be extremely rare for stocks to gain more in 2024 than they did in 2023. Only once in history (1997) did the S&P 500 follow up with a bigger gain after the previous year was up more than 20%.
  • Another 20% gain is possible, however, as it has happened before four times.

Goldilocks Job Numbers as Economy Powers Ahead

The December payroll report was strong on the surface, with 216,000 jobs created last month and the unemployment rate firm at 3.7%. December was the 23rd straight month in which the unemployment rate has remained below 4%. That is the longest stretch since the late 1960s, which indicates the economy is in a healthy place. All in all, 2023 was another banner year for job creation, with the addition of 2.7 million jobs. While that is lower than the 4.8 million jobs created in 2022, average annual job creation per year since 1940 is just 1.5 million, or 2.6 million excluding years with negative job growth, which occur during recessions. In fact, the average annual number of jobs gained from 2010-2019 was 2.2 million.

Job Growth Has Slowed, But That’s Just Normalization

Job creation has been revised lower in prior months, but that’s why it’s useful to turn to the three-month average, which is at 165,000 now. That number has fallen since the beginning of 2023, when job creation was red hot, but it still indicates a very healthy pace and is more than what’s required to keep up with population growth. In fact, monthly job creation averaged 163,000 in 2019, which was a year of solid economic growth.

Should we worry that the slowdown will continue and the dashed line in the chart above will fall further? At this point, no, at least when looking at the totality of labor market data. In a healthy economy, there are always pieces of data that are positive and others that show a mixed picture.

One of the better leading indicators for employment, and the economy, are claims for unemployment benefits. The top panel of the chart below shows initial claims for unemployment benefits across the entire year (2023 in dark blue), compared to claims in 2022 (gray) and the average across 2018-2019 (yellow). It indicates layoffs remain low, which is why initial claims for unemployment benefits match the low levels seen in 2022 and even 2018-2019.

The bottom panel shows the “insured unemployment rate,” which is the number of unemployed workers continuing to receive benefits as a percentage of the labor force. The latest data for 2023 is running around 1.3%, which is historically low and matches the data from 2018-2019. But it is slightly higher than  it was in 2022, when the insured unemployment rate was at record low levels. The takeaway is that unemployed workers are finding jobs fairly quickly, which is why the rolls of continuing claims are not surging above 2018-2019 levels. However, that’s happening at a slower pace than in 2022, when the labor market was running hot.

All in all, the employment data suggests the economy is in a very healthy place.

What Really Matters for the Economy Is Income Growth

As we frequently point out, household consumption comprises 70% of the economy, and that is directly driven by income growth. To understand the underlying potential speed of the economy, there’s no better place to look than aggregate income growth, i.e., income growth across all workers in the economy. It’s a combination of:

  • employment gains, which are solid;
  • hours worked, which are running steady; and
  • wage growth, which is running strong.

Over the last three months, aggregate income growth has been running at an annual rate of 4.3%, which is healthy in itself. Adding to that, inflation has pulled back significantly over the last few months, mostly thanks to lower gas prices but with broad support from several sectors. Adjusting aggregate income growth for inflation shows “real” income growth over the last three months has been running at an annual rate of 3.7%! That’s incredibly strong and shows the economy is in a very healthy place.

A healthy economy means the Federal Reserve may not cut rates as much, nor perhaps as early, as markets expect. Investors anticipate close to six rate cuts (each worth 0.25%) in 2024, with the first one coming as early as March. Those aggressive expectations may be behind the first week market jitters, not to mention some consolidation following the blockbuster gains that occurred over the last couple of months.

The economic numbers continue to suggest there will be no recession in 2024, with a very reasonable margin of error. A healthy economy means solid earnings growth, which in turn supports stock gains. While there’s nothing shocking about stocks taking a breather, the macroeconomic fundamentals continue to indicate that stocks are likely to see solid gains in 2024.


This newsletter was written and produced by CWM, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The views stated in this letter are not necessarily the opinion of any other named entity and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.

S&P 500 – A capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The NASDAQ 100 Index is a stock index of the 100 largest companies by market capitalization traded on NASDAQ Stock Market. The NASDAQ 100 Index includes publicly-traded companies from most sectors in the global economy, the major exception being financial services.

A diversified portfolio does not assure a profit or protect against loss in a declining market.

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