HWM Market Recap - February 2024
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With the new year off and running, Wall Street has bought into the notion that the U.S. is on a glide path to a soft landing. By this, we mean that the Federal Reserve has figured out how to gradually slow the economy and bring down inflation without causing a recession. We will not know whether they indeed accomplished this until after the fact. Still, there is little doubt that if achieved this year, it will be the most widely anticipated soft landing in economic history.
While we are not ready to claim that the soft landing has been achieved, our framework on the macroeconomy in the short term can be separated into three buckets:
There will be a soft landing with decelerating growth and decelerating inflation – similar to what we had last year,
There will be a soft landing with accelerating growth and a stall in the inflation rate coming down. This will likely lead to investors having to broaden out their investments, or
There will be a hard landing, which is still too early to rule out entirely.
The big question economists and investors are asking right now is about overconcentration in certain stocks. Wall Street calls these stocks the Magnificent Seven – Apple, Amazon, Microsoft, Alphabet (the Google parent company), Meta, Tesla, and Nvidia. With these stocks driving a significant portion of the gains in the S&P 500, it begs the question: can the S&P 500 move higher without the Magnificent Seven leading the charge? We call this 'broadening out.' In other words, can other stocks in the S&P 500 sustainably hold up the gains of the index if those seven stocks underperform? We saw the market dispersion spread out in November and December of last year. However, the Magnificent Seven is still decisively leading the gains in the S&P 500.
That said, there is still a massive amount of money in cash and cash equivalent securities (like money market funds) waiting to be deployed into equities. For now, the risk-reward tradeoff between getting 5%+ on cash with minimal risk versus getting a potentially better return on your money but with higher risk has many investors currently choosing the safer option. If the Federal Reserve cuts rates, retirees, in particular, may need to move out of cash back into riskier sources of yield like high dividend-paying stocks. Therefore, if the amount of money in cash reserves comes down, it will flow into higher-yielding and riskier parts of the market.
The reallocation of funds away from cash and cash equivalent securities is predicated on questions yet to be answered by the Federal Reserve including: How much will the Fed cut rates? How soon will those rate cuts come? And how many rate decreases can be anticipated? Chairman Jerome Powell said in the Fed's meeting this month that it will likely be prudent for the Fed to start lowering rates sometime this year, but Powell did not indicate when. He did comment in the meeting when asked about March rate cuts that it is "probably not the most likely case." Therefore, unless something changes, the earliest we would see rates come down would be the Fed's following meeting in May.
We also cannot discount the fact that 2024 will be a year of elections, not just in the U.S. but globally. According to J.P. Morgan, "over 40% of the world's population and economy will hit the polls to elect national leaders" this year. With elections comes uncertainty, which tends to create more pronounced volatility, especially in the lead-up to voting days. Once election results are announced and the uncertainty dissipates, stocks tend to rally once investors have a clearer sense of the path forward. Moreover, when you have an election year where the incumbent is running for re-election, policies are often implemented to bolster the economy to secure votes.
While our short-term outlook for the stock market is positive, many uncertainties remain. The Federal Reserve still needs to decide when it will start cutting interest rates, which will undoubtedly move markets. Also, the labor market has been strong up to this point but is showing signs of weakening. Additionally, inflation has come down, but stickier parts of the economy (like health care and housing) still need to cooperate. Not to mention, there continue to be elevated geopolitical concerns. We will continue to monitor all these factors and endeavor to keep you updated as events unfold.
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Monthly Changes in Indices
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Monthly Performance By Sector
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Jerome Powell, the chairman of the Federal Reserve, announced in its January meeting that the central bank held interest rates steady and indicated that rate cuts might not be coming soon.
The Consumer Price Index (CPI) rose 0.3% month-over-month in December after November’s 0.1% increase. Over the last 12 months, prices increased 3.4%. Core CPI, which excludes food and energy costs, rose 0.3% — the same month-over-month increase as in November – and up 3.9% over the last twelve months.
In December, the Fed’s preferred inflation gauge (the Personal Consumption Expenditures Price Index) rose 0.2% from November. It was up 2.6% over the prior year. Core PCE, which excludes energy and food prices, was up 2.9% over the last twelve months.
According to the Federal Reserve Bank of New York’s December Survey of Consumer Expectations, the median consumer anticipated 3% inflation for the year ahead. For the next three years, consumers expect inflation to come down to 2.6%. For the next five years, that fell to 2.5%.
U.S. GDP grew at a 3.3% annualized rate in the fourth quarter of last year. For the year, the U.S. economy expanded 2.5% for 2023, up from 1.9% in 2022. The growth was driven primarily by strong consumer and government spending.
The number of job openings rose to 9 million in December, up from 8.8 million in November. The number of hires, quits, and layoffs also remained little changed in December. Meanwhile, the unemployment rate held at 3.7% in January for the third month in a row.
The Biden administration will soon begin forgiving the student loans of borrowers who have been in repayment for a decade or more and initially took out $12,000 or less. To qualify, borrowers must also be enrolled in the administration’s new Saving on a Valuable Education (SAVE) plan. If you are expecting the forgiveness and do not receive it, you can call the Federal Student Aid Information Center at 1-800-4-FED-AID to learn more.
The Securities and Exchange Commission (SEC) officially approved new spot bitcoin exchange-traded funds (ETFs) in January. These funds allow investors to have bitcoin exposure in their brokerage accounts without having to buy the digital cryptocurrency. Until January, the Grayscale Bitcoin Trust (ticker symbol GBTC) was the only fund approved to do this. Now, more prominent players like Fidelity, Ark Investments, and BlackRock have been approved by the SEC to offer their own Bitcoin ETFs.
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