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U.S. large-cap stocks kicked off 2024 by bucking declines in other major indexes during the month of January. U.S. large-cap stocks (S&P 500) rose 1.68% while small caps (S&P 600) fell 3.95%. Emerging-market stocks (MSCI Emerging Markets) declined 4.64% while developed-market international stocks (MSCI EAFE) edged up 0.58%. The Bloomberg U.S. Aggregate Bond Index, a broad measure of bonds, slipped 0.28%.*

Markets continue to weigh each new piece of economic news for its potential influence on Fed policy and rate cuts in the months ahead, impacting stock and bond prices. While declining inflation figures helped drive large-cap U.S. stocks higher over the previous few months, there is still the underlying concern that the Fed’s rate hikes, done to cool inflation, could ultimately tip the economy into recession.

However, the latest Gross Domestic Product report showed U.S. economic growth of 3.3% during the final quarter of 2023, outpacing expectations and topping off steady growth overall for the year. That coupled with rising consumer sentiment and continued strength in the labor market increased hopes that the Fed may be engineering an economic “soft landing.”

That means the aggressive rate hikes by the Fed have seemingly slowed activity enough to push inflation down toward its targeted level while still maintaining a solid labor market and some economic growth. In the Fed's post-meeting announcement at the end of the month, the Fed recognized that “the risks to achieving its employment and inflation goals are moving into better balance.” 

However, Fed Chair Jerome Powell cautioned about declaring victory over inflation too soon and said not to assume rate cuts in the near future as the Fed needed more confirmation of inflation’s downtrend. Powell’s statements as well as mixed quarterly earnings reports from technology companies tempered gains in large-cap stocks late in the month.

While U.S. large-cap stocks posted their third straight month of gains, there are, as always, a number of unknowns that may account for weakness in other areas of the market. For example, the outcomes of recent geopolitical events and the ultimate impact of the Fed’s rate hikes remain uncertain.

Expectations can shift suddenly – both positively and negatively – and impact market performance. Already, the market has adjusted the number of rate cuts it expects this year after data in January failed to show further declines in headline inflation numbers.

While short-term volatility may occur, it’s important to remember that we design portfolios to deliver outcomes over longer-term periods measured in years, if not decades. And we diversify investments to help capture upside during market rallies while attempting to mitigate downside risk during periods of volatility. If you have questions about your portfolio allocations or if your financial circumstances have changed, please don’t hesitate to reach out to your planner.

* Index return data provided reflects “total return,” which includes income generated by securities held within the index, such as dividends and interest. Because it includes income, index total returns can differ from index price returns that only consider prices.