February 2024 Market Perspective
2024 is off to a solid start with January continuing the rally that began last November. All three major U.S. stock indices posted handsome gains for the month with the S&P 500 and Dow gaining 1.68% and 1.31%, respectively, and the NASDAQ up 1.04%. While January’s gains were less than those in December, this still marks three consecutive months of gains for the three indices.
The positive start to the year was supported by improving market fundamentals. According to Bloomberg Intelligence as of January 31, with 37% of companies having reported actual earnings, the average earnings growth rate for the S&P 500 in the 4th quarter came in at 3.95%. This is well above analyst estimates at the start of earnings season for a much smaller 1.18% increase. These better-than-expected results were widespread, as nine of the eleven sectors of the S&P 500 reported higher earnings than forecasted. Over the long run, fundamental factors drive market performance, so these positive earnings results are a good sign for investors.
Foreign stocks posted mixed performance for January. The MSCI EAFE, an index of developed foreign stocks, gained 0.58% for the month. The MSCI Emerging Markets index did not fare as well, dropping 4.63% in January, extending the outperformance of domestic stocks relative to foreign stocks.
The struggling bond market has impacted all but the most aggressive investors since early 2022. Bonds are typically used in portfolios to help reduce stock market volatility, but that has not been the case since inflation and interest rates skyrocketed two years ago. An end-of-year rally which began last November helped most bonds post modest gains for 2023. Most recently, however, Federal Reserve (Fed) chair Jerome Powell threw cold water on hopes that the Fed would begin to cut short-term interest rates at their March 20 meeting by stating it was highly unlikely rate cuts would begin in March. As of the writing of this newsletter, the CME FedWatch Tool estimates that there is a better than 50% chance of at least a 0.25% (25 basis points) rate cut at the Fed’s May 1 meeting.
Signs that the overall economy is still showing continued growth was highlighted by the fourth-quarter gross domestic product (GDP) coming in at a stronger-than-expected 3.3%. This strong economic growth was supported by healthy job growth, especially in December. The unemployment rate ended 2023 at 3.8%, signaling continued demand for workers throughout the economy. But while the January economic updates largely pointed toward continued growth, they also contributed to still elevated levels of inflation. The consumer price index (CPI) increased in January at a year-over-year rate of 3.1%, while analysts estimated 2.9%, down from year-over-year of 3.4% in December. Core inflation for January, omitting food and energy prices, came in unchanged at 3.9%.
Consumer spending growth also remains strong, largely supported by improved consumer sentiment based on falling inflation expectations and an improved outlook on current economic conditions. Historically, improved consumer sentiment has supported faster spending growth, so this is a positive sign for consumer spending in 2024. This consumer spending growth comes with some concerns over the explosion in recent years in personal household debt. According to the latest quarterly report on household debt and credit, total household debt rose by $212 billion to reach $17.5 trillion in the fourth quarter of 2023. Credit card balances alone increased by $50 billion to a total of $12.25 trillion over the quarter.
In addition to rising levels of consumer debt is the increasing amount of cash investors are keeping on hand. According to the Investment Company Institute, total assets in money market funds rose to $4.814 trillion in the first week of 2024. “It’s a mountain of money!” wrote Bank of America technical research strategist Stephen Suttmeier. “While this seems contrarian bullish, higher interest rates have made holding cash more attractive.” As Treasury rates have begun to soften slightly in recent weeks, some investors have found their way back into the stock market. According to Morningstar, investors plowed $57 billion into U.S. mutual funds and exchange traded funds in December 2023, the largest monthly sum of the year.
With the outlook of lower interest rates, solid corporate earnings growth, improved consumer sentiment, and plenty of cash on the sidelines, we remain cautiously optimistic that the stage is set for a continued strong domestic stock market in 2024. But as always, it will be one step – one economic report – at a time. All eyes will be on the Fed, not so much at their March 20 meeting, but at their May 1 meeting and beyond. With inflation continuing to slowly decline and a Fed eventually willing to cut interest rates, the patient investor may be rewarded in the months to come. But there no guarantees and only time will tell.
All indices are unmanaged, and investors cannot actually invest directly into an index. Unlike investments, indices do not incur management fees, charges, or expenses. Past performance does not guarantee future results.
