Stocks finished 2023 on a historic winning streak.
The S&P 500 (^GSPC) enters the new year having risen for nine straight weeks, the longest consecutive run of weekly gains since 2004.
The first week of trading in 2024 will instantly put the rally to the test with a crucial December jobs report slated for release on Friday morning. The economic calendar will also feature meeting notes from the Federal Reserve, the latest update on job openings, and fresh data on activity in the manufacturing and services sectors.
On the corporate side, quarterly reports from Cal-Maine Foods (CALM), Walgreen Boots Alliance (WBA), and Constellation Brands (STZ) highlight a sparse week of corporate results. Quarterly delivery numbers from electric vehicle maker Tesla (TSLA) will also be closely tracked by Wall Street.
Trading is set to resume on Tuesday after markets closed for New Year's Day on Monday.
A roaring two-month rally brought several of the major indexes to all-time highs or close to it at the end of last year. The Dow Jones added 13.7%, or more than 4,500 points in 2023, and breached 37,000 for the first time ever. The S&P 500 added 24%, pushing the major average within striking distance of its record close of 4,796.56. Meanwhile the Nasdaq Composite (^IXIC) added 43.42%, its best yearly return since 2020.
Increased bets that the US economy could achieve the vaunted "soft landing" — where inflation retreats to the Fed's 2% goal without a recession — drove the stock market rally to end 2023. A key piece of that narrative has been that the labor market has held up more than many expected.
Notable parts of that storyline include an unemployment rate hovering near the same levels as when the Fed began its rate hiking cycle, the ratio of unemployed workers to job openings hitting its lowest level in more than two years, and minimal upticks in layoffs as tracked by weekly jobless claims.
To some economists, all of this shows a labor market that's cooling enough that cash-flush consumers won't send inflation higher but isn't so weak that a recession may be inbound.
Projections for the December jobs report reflect a similar narrative. The report is expected to show 168,000 nonfarm payroll jobs were added to the US economy last month while the unemployment rate ticked higher to 3.8%, according to data from Bloomberg. In November, the US economy added 199,000 jobs while the unemployment rate unexpectedly declined to 3.7%.
"We do not expect to see a sharp contraction in employment just yet, but remain cautious as we head into 2024," Jefferies's economics team led by Thomas Simons wrote in a research note on Friday. "With the UAW strike finally in the rearview, we expect the volatility in manufacturing payrolls we saw over the last couple of months to level out."
Markets are entering the new year betting that the Fed cuts interest rates in March. As of Tuesday, investors put a 82% chance on a rate cut by the end of the March meeting, per the CME FedWatch Tool.
But among economists, there's no consensus on that expectation. To Morgan Stanley chief US economist Ellen Zentner, data like the December jobs report will have to indicate more signs of cooling than have so far been presented for the market's current projection of a March cut to happen.
"Resilient labor markets with a soft downward trend also point to a later start to cuts than what markets are expecting," Zentner wrote in a research note on Dec. 19.
Zentner believes monthly payroll additions would have to sink below 50,000 by February's report, coinciding with consistent low inflation readings, for the Fed to cut in March. And even then, the job slowdown would have to be a trend, not one low reading.
"Nonfarm payrolls are noisy, so we do not think one weak print will suffice for a rate cut," Zentner said of jobs reports.
Morgan Stanley's base case remains the first Fed cut will come in May.
Broadly, one of the largest questions facing investors will be whether the late 2023 rally simply pulled up the timeline of the gains investors expect in 2024, or if the market has further to run past its current level of all-time highs.
Ryan Detrick, the chief markets strategist at Carson Group, points out that history is on the side of stocks continuing gains in 2024.
In years where November and December brought an S&P 500 rally of more than 10%, which just happened at the end of 2023, the benchmark average rose an average of 19.5% in the next year, per Detrick's research.
But even some of the market's biggest bulls have noted recently that those gains aren't likely to come at a steady pace upward. Fundstrat head of research Tom Lee, who holds one of the highest targets for the S&P 500 next year at 5,200, sees a decline coming for the major average early in 2024.
"To us, it is only a matter of days before we make new all-time highs [for the S&P 500]," Lee wrote in a note to clients on Friday. "But then we likely consolidate."
Lee believes a few key concerns could weigh on markets. He believes investors could get “itchy” around when the Fed will cut rates and points out that a downturn around February or March in an election year is typical.
“In the current context, we could see S&P 500 4,400-4,500 once we make all-time highs, or a modest pullback,” Lee wrote. “This is consistent with our 2024 Year Ahead Outlook, where our base case is the S&P 500 makes most of its gains in [the second half of 2024].”
Weekly calendar
Monday
Markets are closed for the New Year's holiday.
Tuesday
Earnings: None of note
Economic data: S&P Global US Services PMI, December, final (48.4 expected, 48.2 previously); MBA Mortgage Applications, week ending Dec. 29
Wednesday
Earnings: Cal-Maine Food Groups (CALM)
Economic data: JOLTS Job Openings, November (8.85 million expected, 8.73 million previously); ISM Manufacturing, December, (47.2 expected, 46.7 previously); ISM prices paid, December (49.9 previously); FOMC meeting minutes
Thursday
Earnings: Conagra Brands (CAG), LambWeston (LW), Walgreens (WBA)
Economic data: ADP employment change, December (113,000 expected, 103,000 previously) Challenger jobs cuts, year-over-year, December (-40.8% previously); Weekly initial jobless claims, Dec. 30 (218,000 previously) S&P Global US Composite PMI, December, final (51 previously)
Friday
Earnings: Constellation Brands (STZ)
Economic data: Nonfarm payrolls, December (+168,000 expected, +199,000 previously); Unemployment rate, December (3.8% expected, 3.7% previously); Average hourly earnings, month-over-month, December (+0.3% expected, +0.4% previously); Average hourly earnings, year-over-year, December (+3.9% expected, +4.0% previously); Average weekly hours worked, December (34.4 expected, 34.4 previously); Labor force participation rate, December (62.8% expected, 62.8% previously); Factor orders, November (+2.1% expected, -3.6% previously); Durable goods orders, November (+5.4% previously); ISM Services, December (52.5 expected, 52.7 previously)
Josh Schafer is a Reporter for Yahoo Finance.
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