Market forecast or self-fulfilling prophecy?
Wall Street strategists began the year calling for a pull back in U.S. stocks after the huge year-end rally of 2023.
So far that call is right on. NASDAQ 100 stocks fell 1.1% today, Wednesday, January 3, to extend their losing streak to four days, the longest in more than two months. The Standard & Poor’s 500 ended the day down 0.80% and the Dow Jones Industrial Average closed down 0.76%. The NASDAQ Composite lost 1.18% on the day. The Russell 2000 small-cap index dropped 3.32%. The CBOE S&P 500 Volatility Index (VXI) gained 6.44% to a still very low “fear” rating of 14.05.
But what’s the cause and what’s the effect? Are stocks falling because something fundamental and important has changed in the economy. The latest figures on the jobs market show a continuing slow down in the labor market–but a month ago that would have been greeted as good news since it would have cemented odds that the Federal Reserve would begin cutting internet rates soon. The minutes from the Fed’s December meeting, released today, do have fodder for the view that the financial markets are counting on the Fed to begin its cuts faster than the Fed intends to move. But that view was available for anyone who looked during the rally off the October lows.
Or are they falling because the current Wall Street consensus is encouraging investors and traders to sell?
I think a lot of this recent drop is an issue of timing. Think of selling in January as the inverse of selling in December. In December an investor sold losers to reap a tax benefit for 2024 taxes. Taking profits in a winner in January, on the other hand, means that an investor won’t need to pay taxes on those gains until he or she files a 2024 tax return in 2025.
Add in valuations that are very stretched and there is an argument for being prudent and selling a winner or two or three now.
But I think the big reason for selling is the persistent belief that returns must revert to the mean and that a big gain for the end of 2023 must be balanced by a retreat back to the long-term trend line in early 2024. Investors with a tendency to believe in a “return to the mean” story form a ready audience for suddenly risk-averse Wall Street strategists.
Those strategists may themselves be reacting to a year-end 2023 rally that almost everyone (myself included) missed. Getting skepticism right in early 2024 would burnish some reputations that got tarnished in 2023.
There’s an investing saw that goes “Stocks don’t have memories but investors do.” Don’t forget that as you try to make sense of what looks like a pull-back that could run for the rest of the month.
