HWM Market Recap - March 2024
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Over the last two years, a concentrated section of the stock market has been on a wild ride. Specifically, those stocks are commonly referred to as the Magnificent Seven – Apple, Amazon, Microsoft, Alphabet (the Google parent company), Meta, Tesla, and Nvidia. The bear market of 2022 has become a tech-driven rally that has carried the Dow Jones Industrial Average, NASDAQ, and S&P 500 indices to new highs. Also, the Russell 2000 (which tracks smaller companies and historically has been the most robust index coming out of a bear market) has erased a good amount of its losses from 2022 but still has some room to run before it hits its all-time high.
Traditional economists will tell you that they like sustainable, broad-based bull markets rather than narrow stampedes – the latter of which we are seeing now. The troubling truth is that when a few stocks roar to the upside like this, at some point, they will have to slow and decrease back to some semblance of normalcy (in investing, we call this reversion to the mean). It is only natural that, as investors, we want to join in on the euphoria and not miss out on gains in the stock market. However, with the S&P 500 benefitting from these few companies growing almost unabated and seemingly hitting new highs daily, we have to wonder, 'How much higher can the index go before it pulls back?'
Consumer attitudes about the state of the economy have bobbed around a bit over the last couple of years but appear to be rebounding. Both Consumer Confidence (how people feel about the overall economy, employment, and spending) and Consumer Sentiment (how individuals feel about their personal circumstances) have noticeably increased. These types of surges in consumer attitude are not generally seen heading into recessions. A driving factor for the recovery in consumer sentiment has been the anticipation of the Federal Reserve (the Fed) cutting rates in 2024.
As the Fed previously estimated, it is on track to cut rates by two or three times this year rather than upwards of five to seven times as some investors more aggressively speculated. With where we sit today, there does not appear to be a need for the Fed to cut rates in the first half of the year because the economy is doing well. To use an old adage, 'If it ain't broke, don't fix it.'
In addition, while no landing is without its turbulence, the evidence of a soft landing (the 'Goldilocks scenario') is looking better with the continued easing of inflation pressures. The Core Personal Consumption Expenditures (PCE) Index – the Federal Reserve's preferred measure of inflation – is currently at 2.8% annualized. In fairness, this is still almost a percent above the Fed's 2% target, but it has been declining. Economists tend to microanalyze inflation numbers by breaking them down into their components (i.e., food, healthcare, transportation, gas, housing, etc.). Doing so tends to paint a different picture from the overall inflation rate. However, the simple fact is that overall inflation continues to moderate. This does not mean that prices are coming down, just that the rate of increase is slowing.
We are encouraged by the short-term momentum in the stock market, but we also want to remain vigilant. While mortgage rates have fallen about 1% since their peak in October, current home prices are still extremely elevated, causing a widespread affordability issue. Moreover, credit card debt has hit a record high, and delinquent balances are rising. Furthermore, while evidence of a potential soft landing continues to build, it is still an inherently tricky feat to pull off. The good news is that despite mounting stress, consumers are optimistic about the economy. Generally, the economy goes where consumer sentiment goes. As consumer sentiment builds, so should the odds of a soft landing.
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Monthly Changes in Indices
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Monthly Performance By Sector
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The Consumer Price Index grew 0.3% in January month-over-month and 3.1% from a year prior. The Core CPI (which excludes food and energy prices) for January inflation was 0.4% month-over-month and 3.9% higher than January 2023.
According to Freddie Mac, as of the end of February, the 30-year fixed rate mortgage is 6.94%.
According to data from the National Association of Realtors, existing home sales increased by 3.1% in January compared to December. Over a one-year period, home sales declined by 1.7%. The median existing home sale price for all housing types increased by 5.1% from a year ago to $379,100.
Payrolls in January rose by 353,000 new jobs, and the unemployment rate held steady at 3.7%.
The University of Michigan’s consumer sentiment index moved more or less sideways in February compared to January’s reading, thus maintaining gains in sentiment over the past three months. According to the Surveys of Consumers Director Joanne Hsu, “Consumers perceived few changes in the state of the economy since the start of the new year, and they appear to be assured that inflation will continue on a favorable trajectory.” The sentiment index sits 8 points shy of its historical average since 1978.
The White House canceled student debt for 153,000 borrowers, totaling about $1.2 billion. The program applies to those who have been paying off federal loans for at least ten years and had initially taken out $12,000 or less. Furthermore, for every extra $1,000 of borrowed funds, individuals can receive loan forgiveness after an additional year of payments. According to Education Secretary Miguel Cardona, this round of forgiveness brings the total amount of student debt canceled under the Biden administration to about $138 billion for nearly 3.9 million people.
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