Financial markets kicked off 2024 on a weaker note following last year’s robust returns. The major U.S. large cap equity benchmarks broke nine-week winning streaks as the mega-cap tech stocks that drove much of last year’s market gains faltered out of the gate. Additionally, investors dialed back some of their year-end enthusiasm for sharp rate cuts as economic growth momentum continued to look healthy through December as highlighted by another stronger than expected jobs report. For the shortened holiday week, the Nasdaq dropped 3.2%, its biggest drop since September, while the S&P 500 fell 1.5% and the Dow Jones slid 0.6%. The three indices respectively notched returns of 44.6%, 26.3%, and 16.2% in 2023.

Last week’s December jobs report was a bit of a mixed bag but was generally well received by investors as falling in the not-too-hot and not-too-cold sweet spot. The U.S. economy added many more jobs than expected in December, as nonfarm payrolls grew by 216k, but prior month job gains were revised down by 71k. In total, monthly job growth in the fourth quarter averaged 165k, down from 221k in the third quarter but still solid especially considering the UAW strike in October. The unemployment rate held steady at 3.7%. However, it wasn’t all good news from the Fed’s perspective as wage inflation ticked up to 4.1% year-over-year from 4.0% in November and labor force declined, which may put further upward pressure on wages. If the labor market continues to run too tight, it could mean the Fed will delay its initial rate cuts, which traders have been anticipating beginning as soon as March.

The latest FOMC minutes provided only minor insight on the timing of potential interest rate cuts, with Fed officials acknowledging "an unusually elevated degree of uncertainty" about the economic outlook. Some Fed members also noted that keeping the benchmark rate at an elevated level might be necessary should inflation stay above target, meaning the central bank will continue to base its policy decisions on incoming economic information.

Congressional leaders reached an agreement on 2024 government spending over the weekend to avoid a shutdown later this month. The agreement caps top-line spending at roughly $1.66 trillion, in line with President Biden’s deal last year with Kevin McCarthy, the former House speaker. But it’s unclear if there are enough votes to win over conservatives and avert a partial government shutdown in less than two weeks.

The week ahead will be headlined by updates on two of the most important market drivers in the year ahead: inflation and corporate earnings. On Thursday, the December Consumer Price Index report is expected to show that headline inflation ticked up last month while “core” inflation, which excludes food and fuel, cooled slightly. On the corporate earnings front, fourth quarter earnings season will kick-off later this week with several of the largest financial services firms on the docket to report results, which will provide an important barometer for consumer and economic activity. According to FactSet, fourth quarter earnings for the S&P 500 are expected to have grown just over 1% compared to a year ago, but investors will be more interested in outlooks for 2024 where the current consensus growth forecast sits at a notable 12% increase. Further upside for U.S. equities after last year’s strong results will depend on the continuation of last year’s disinflation trend and the ability of corporate earnings to clear a high expectations hurdle.