What happened last week
- The S&P 500 snaps its 9-week winning streak to end Friday less than 3% from all-time highs.
- Rates moved higher across the Treasury yield curve, weighing on small-caps; this highly levered segment was one of the leaders of the 4Q ‘23 surge in equities.
- The signal from last week’s price action was potentially confounded by light volumes, idiosyncratic companyspecific developments, and year-end flows.
What we’re watching this week
- U.S. CPI, in addition to inflation reports from other major economies, is a main macro catalyst this week.
- The start of earnings season on Friday will provide valuable company-specific fundamental data to the outlook..
- Given last week’s move in rates, Treasury auctions will be closely watched; the presidential election in Taiwan is also in focus.
Horizon’s Investment Management Views
Last week’s shortened trading week was not the one the bulls were hoping for – the S&P 500 declined about 1.5% to snap its 9-week winning streak, while dreams of the rally broadening out were dashed by small-caps’ decline of about 3.6%. Bond markets also reversed their positive trend last week, pushing up yields across the curve. We are not concerned by the shaky start to the year, especially given last week’s low volumes and light investor engagement. Other technical factors, such as two separate analyst downgrades of AAPL, a flood of investment grade bond issuance, and potential tax or window-dressing related flows, likely played a role in last week’s action as well. Looking forward to the next few months, we view this consolidation as a healthy development.
Our optimistic take on last week’s price action was supported by Friday’s strong and healthy U.S. jobs report. The labor market remains key to our outlook, and December’s report shows continued fuel for consumer spending, but in a way that does not stoke inflation concerns as in 2022 and early 2023. However, last week’s steady-as-she-goes jobs release removed almost one full Fed cut from the curve this year. We still view the March meeting as the first ease in policy and are looking through the noise – policy headwinds turning to tailwinds is an important takeaway.
This week is a big one, and hopefully, one that will be met with full and engaged trading desks. Friday is the official start of earnings season, with many of the mega banks reporting. Inflation is the theme of the macro calendar across the globe – the US CPI report on Thursday is a highlight, but we will also see updates from major economies in Asia throughout the week. Given the volatility in rates and the deluge of corporate supply last week, this week’s Treasury auctions (3 year, 10 year, and 30 year) will be closely scrutinized. Lastly, presidential elections in Taiwan may have important geopolitical implications for the Sino-US relationship.
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