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Monthly Market and Economic Update

March 6, 2024

Monthly Market and Economic Update

CURRENT MARKET AND ECONOMIC CONDITIONS

  • In February, the S&P 500 Index was up 5.34%, while the Bloomberg Barclays US Aggregate Bond Index was down 1.41% and the Bloomberg Barclays Municipal Bond Index was up 0.13%.
  • Despite some unexpectantly strong economic data, the stock market rose to new all-time highs in February. The bond market stalled as inflation was a bit stronger than expected. 
  • The futures market is now pricing the first Federal Reserve rate reduction for mid-year. The Fed continues to be consistent in their messaging that they will hold rates higher for longer until the signs that inflation is well under control become more evident.

BOND MARKET

  • The continued strength of the US economy has caused the markets to become less optimistic for an early rate reduction. Early projections of first quarter GDP growth provided by the Atlanta Fed GDPNow model shows growth at 2.1%. The job market remains strongly supportive of the economy. Initial claims for unemployment insurance and jobs opening (JOLTS) index remain at historically strong levels. The benchmark 10-year Treasury yield rose during February from 3.86% to 4.18%. At the beginning of the year, the futures market had reflected the expectation of the Fed reducing rates in March. With the stronger than expected economic growth and “sticky” inflation, the futures market is now pointing toward June or July for the first reduction, and maybe one or two more before the end of the year.
  • For bond investors, the combination of higher current interest rates and potentially rising values due to the possibility of falling yields may result in a rather ordinary but potentially positive year for bonds. Given the volatility in bond values over the past few years, ordinary is likely welcome. The probability of a soft landing for the economy is increasing. 2024 started with strong results for the key indicators for economic growth – jobs growth, consumer spending, and industrial production. Despite numerous recession forecasts in 2022, 2023, and now going into 2024, the actual economy continues to grow. 

STOCK MARKET

  • The stock market has put aside “higher for longer” rates and election year uncertainty to focus on artificial intelligence and the various permutations that it creates for industries beyond the tech sector. The “Magnificent 7” stocks continue to pull the indices higher. In February, the market momentum broadened to US small cap and midcap stocks, which outperformed the S&P 500 index during the month.
  • It should be noted that the S&P 500 Index is currently overvalued relative to historical averages and may be ripe for a short-term correction. However, the broader market is generally undervalued, so any correction is likely to be contained. Markets have corrections during most years, usually in the order of a decline up to 10% from highs. Of course, accurately predicting the direction of the markets in the short run is not possible. Investors should focus on the longer-term path of the stock market and the economy and take advantage of any short-term correction by rebalancing to their appropriate risk profile.
  • Election years always provide enough uncertainty to heighten the market’s anxiety. Historically, regardless of the election outcome, the market is most volatile during the primary elections as the swings in voter sentiment cause uncertainty regarding which candidates will prevail for each party. However, the uncertainty this year has less to do with the selection of candidates and more to do with potential surprises outside of the actual primaries. It should be noted that the stock market is significantly more focused on economic and earnings growth, and the direction of inflation and interest rates rather than on the election cycle.
  • The US economy has transitioned from the rapid recovery phase to a slower growth phase between 2020 and 2023. With the Federal Reserve prescribing strong medicine in the form of higher interest rates, certain market sectors and the overall economy have endured some short-term side effects. Now that the Federal Reserve is projecting a pivot to lower interest rates in 2024, the markets are behaving as if we are in an economic recovery which should mean leadership broaden out toward stocks that have been overlooked and undervalued. Those opportunities can be found in both US and international stocks. 

PORTFOLIO MANAGEMENT

  • The allocation for each investor should be diversified between growth and safety based on their own tolerance for risk in the short run and their desire for growth in their investments in the long run. Determining the appropriate asset allocation and risk-reward trade-off is the most important decision for investors.  Once determined, staying invested during periods of uncertainty and rebalancing back to the selected risk profile can help investors achieve their long-term goals.