FEBRUARY 2024 MARKET INSIGHTS
For the month of January, the stock market, as measured by the S&P 500, returned 1.7%1. The equity market has been watching the Fed very closely for clues on when the Federal Reserve might want to start cutting the Federal Funds rate. The more recent inflation and wage data has not been as constructive for rate cuts so we will need to pay close attention to earnings to see if equities can propel higher from this level. Early earnings reports have shown some weakness thus the stock market strength since November has been significantly driven by expected rate cuts by the Fed.
The bond market, as measured by the Bloomberg Aggregate Bond Index, returned -0.3% for the month1. It was an active month in fixed income. While the 10-year Treasury yield increased by 3 basis points, ending January at a yield of 3.91%, we saw a high of 4.18% and a low of 3.88%1. The 2-year Treasury declined by 4 basis points and ended the month at a yield of 4.21%1. The market has been very focused on the shape of the yield curve which at one point in 2023, saw the yield of the 2-year Treasury over 100 basis points higher than the 10-year Treasury. Historically, an inverted yield curve has portended a recession. More recently, the spread between 2-year and 10-year Treasury issues has increased by 7 basis points to about -30 basis points1. The 2-year to 10-year yield spread narrowed to a low of -17 basis points and was as wide as -42 basis points1. Does the lessening of the yield curve inversion mean that a recession is off the table? We do not think that this is the case, but a movement to a flatter curve may lead to a less severe recession if one occurs.
As we look at other economic indicators, oil was up nearly $5.50 per barrel during the month to $75.85 and hit a high during the month of over $781. The continued unrest in the Middle East due to the continued fighting in Gaza and the aggressive activities of the Houthi rebels are all adding into the upward pressure on the price of oil. Inflation continues to be an issue as headline inflation grew by 3.4% year-over-year and grew by 3.9% when food and energy are factored out of the equation1. Unemployment stood at 3.7% in January and hourly earnings are increasing at an annual rate of 4.5%1. Economic activity continues to show strength with Factory Orders increasing by 0.2%, Durable Goods flat month over month, Industrial Production up 0.1% from the previous month, and the S&P 500 manufacturing PMI was 50.7, indicating expansion in the manufacturing sector1. Finally, the Index of Leading Indicators was down 0.1%, continuing to indicate a coming slowdown in economic activity1.
What does all of this mean? When we look at the continued strength in the employment market and wages that are growing in excess of inflation, it may be difficult for the Fed to start cutting rates. The Fed has a mandate to control inflation and to keep the economy at maximum employment. By any measure, an unemployment rate of 3.7% illustrates very little slack in the labor market. This is certainly part of the explanation for wages growing at 4.5% over the trailing 12 months. We continue to believe that the Fed is most focused on slowing inflation so we could see the Fed either pause on the start of a rate cutting cycle and, in the extreme, be forced to tighten fiscal policy even further. We believe the next releases of inflation data will be key, particularly on the heels of the recent release of job creation and wage growth statistics.
Beyond our economic issues, we need to remain focused on the continued fighting in Ukraine. As we have discussed previously, Putin wants Ukrainian territory to end fighting and Ukraine wants the Russians and their proxies out of Ukraine. It appears that the European Union may be ready to fund Ukraine for an additional 50 billion euros in military aid. Recent reports have indicated that Ukraine is in need of ammunition and other munitions to keep up their fight. Part of the mess is that Russia wants to claim territory that they only believe they are entitled to, and while the world is growing weary of funding this war, questions of corruption over all of the aid that has flowed into Ukraine since the start of the conflict are mounting.
The unrest in the Middle East is also a significant issue facing the world. After Hamas murdered innocent Israelis, Israel struck into Gaza with a goal of the eradication and destruction of Hamas. In the meantime, Hezbollah and Houthi rebels have been active. Hezbollah has fired rockets into Israel and the Houthis have been wreaking havoc by firing on cargo and oil vessels. The U.S. has been bombing Houthi weapon caches and the USS Carney has been actively intercepting a number of Houthi fired rockets. Iran has been posturing that they do not want war and the activity is solely the Houthis, however, we view this as a pretty thin argument given that the Iranians are the financial supporter for the Houthis. The destabilizing impact of this fighting is the concern, particularly if the fighting grows to encompass the entire region and other countries.
Finally, the Presidential election season is fully upon us. The Republican side is really down to two viable candidates: Donald Trump and Nikki Haley. It is interesting that recent polls show that Trump and Biden are in a statistical dead heat, however, Nikki Haley leads Biden. Such is the state of play, as Haley might have a better chance of beating Biden in a national election across partisan and independent voters, but she may not be able to win her own party’s nomination. We also think there could be a late switch for President Biden given widely accepted views on his cognitive decline. There are more miles to cover and more twists and turns before final nominations. The unsettled nature of this election may add to market volatility.
Other than all of this, there is not much going on! Until next month.
