Equities racked up big gains last year, but as January 2024 unfolds, investors have adopted a more defensive stance. The bullish case hasn’t significantly changed. We’re witnessing profit-taking and a wait-and-see approach as geopolitical uncertainty deepens.

Valuations were getting stretched and a “yellow light” to slow down is warranted. Expectations are still in place that the Federal Reserve will cut rates this year, but sentiment has turned slightly more pessimistic in terms of how soon this pivot will occur.

Supply chain worries have resurfaced, due to protracted strife in Gaza and Eastern Europe, as well as terrorism against shipping in the Red Sea. Inflation has been curbed but not conquered; it could flare up again.

Hence the recent spike in bond yields, as evidenced by the uptick of the benchmark 10-year U.S. Treasury yield (see chart, with data as of market close January 18).

The yield has popped above 4.1%, which is spooking stock investors. It didn’t help that Fed Governor Christopher Waller gave a speech Tuesday that pushed back against expectations of imminent rate cuts.

“When the time is right to begin lowering rates, I believe it can and should be lowered methodically and carefully,” Waller stated. “In many previous cycles…the FOMC cut rates reactively and did so quickly and often by large amounts. This cycle, however…I see no reason to move as quickly or cut as rapidly as in the past.”

Waller’s downbeat observations threw cold water on the “fear of missing out” rally. Rate cuts may not come as soon as early 2024, after all. The CME Group’s “FedWatch” tool currently indicates there’s a 97.4% chance that the Federal Open Market Committee (FOMC) will stand pat on rates (5.25% to 5.50%) at its Jan. 31 meeting.

Global equities have been slumping as well, after data this week showed lackluster economic growth in China and a resurgence of inflation in the U.K.

It’s also worrisome that China’s birthrate in 2023 dropped for the second consecutive year. New births fell 5.7% to 9.02 million, the lowest ever recorded at 6.39 births per 1,000 people. That doesn’t bode well for the economic vibrancy of China, which is the global economy’s growth engine.

In Germany, growth has fallen to a standstill. The economic powerhouse of Europe, the country currently struggles to compete with China’s inexpensive vehicles and Silicon Valley’s innovation.

S&P 500 corporate earnings for the fourth quarter of 2023 are starting to pour in. So far, the numbers are mixed.

Read This Story: Q4 Earnings: A Mixed Bag (So Far)

But in the stock market, beating expectations is what counts, not the absolute number. Although the big banks have largely disappointed, companies in other sectors are blowing past estimates. If this trend continues, stocks will have the fuel they need to continue the rally.

Bank of America (NYSE: BAC) came to the stock market’s rescue, at least temporarily, on Thursday when it upgraded Apple (NSDQ: AAPL) to a “buy.” The Cupertino computer giant is an economic bellwether that’s been beleaguered lately. BAC’s vote of confidence boosted AAPL shares by 3.3% and also restored bullish sentiment in the broader market.

The main U.S. stock market indices closed higher Thursday, as follows:

• DJIA: +0.54%
• S&P 500: +0.88%
• NASDAQ: +1.35%
• Russell 2000: +0.55%

Economic resilience is key…

The trump card for investors is the resilience of the U.S. economy. (Remember the bygone days when the word “trump” had more benign connotations?)

The Commerce Department reported Wednesday that U.S. retail sales rose 0.6% in December compared to the previous month. Stripping out more volatile items such as gasoline sales, which were down sharply for the month, “core” retail sales climbed 0.8% month-over-month.

For the full year of 2023, total retail sales were up 3.2% from 2022. These quarterly and full-year numbers beat expectations. Worried about the rise of political extremism, at home and abroad? Just remember that the most powerful “ism” in the United States is consumerism.

Never underestimate the desire of Americans to go shopping, even amid scary news headlines. You think baseball, or maybe football, is the national pastime? Nope. It’s buying stuff.

About three-fourths of U.S. gross domestic product is made up of consumer spending, and in turn about three-fourths of consumer spending occurs during the holidays.

This past holiday shopping season was strong and the momentum is carrying over into 2024, due to a robust jobs market and rising wages. But we’re also seeing a moderation of employment growth and signs of consumer fatigue. In other words, the “Goldilocks” economic situation is alive and likely to shore up the equity markets this year.

But stay on your guard. The geopolitical equation is fraught with risks and a flare-up of military mayhem could be inflationary.

Speaking of mayhem…

My colleague Jim Pearce doesn’t worry about market mayhem. He makes money from it.

Jim Pearce is chief investment strategist of our premium trading service, Mayhem Trader. Jim has developed an under-the-radar strategy to flip market mayhem into fast payouts. Want to learn more? Click here now.

John Persinos is the editorial director of Investing Daily.

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