MARCH 2024 MARKET INSIGHTS

For the month of February, the stock market, as measured by the S&P 500, returned 5.4%¹. The market continued to enjoy strong flows while trying to gauge the next move by the Fed. Consumer Prices slipped to 3.1% and the core rate (ex-food and energy) stood at 3.9% as of the most recent release. The Personal Consumption Expenditures Index (PCE) rose by 2.8% over the previous 12 months. Overall, inflation has come down significantly from the near-term peak of 9.1% but has remained stubborn in reaching the Fed’s ultimate target of 2.0%. Many market prognosticators were questioning if the Fed Funds rate would be reduced four or five times, and now, there are some calling for no cuts and potentially an additional hike if inflation does not become tamer. Overall, until the inflation picture becomes clearer, we do believe that this will add volatility in the equity markets.

The bond market, as measured by the Bloomberg Aggregate Bond Index, returned -1.41% for the month¹. It was an active month in fixed income with the yield on the 10-year Treasury ending the month at 4.25%, nearly 34 basis points higher than the end of January. The 2-year Treasury rose by about 41 basis points and ended the month yielding 4.62%¹. As we continue with the inverted yield curve, we cannot take the possibility of a recession off of the table.

It is becoming a bit tiring and repetitive, but there is still a significant tug-of-war and we are trying to see which side will be pulling a little harder. On one side is inflation where the markets and the Fed are hoping that price pressures continue to decline; this will give the Fed room to begin reducing the Fed Funds rate. On the other side is the combination of employment and wage growth. The last two readings of nonfarm payroll employment have shown job growth of 686,000 jobs and an unemployment rate of 3.7%. When I was in school, we were taught that full employment was 96% due to the friction of people changing jobs and other varying factors. With unemployment standing at 3.7%, the employment market is seemingly running strong. Wage growth continues to be an issue on the inflation front with the most recent annual wage increase reading 4.5%. Fundamentally, we have wages growing faster than inflation, which by itself will be inflationary. When this is coupled with a tight labor market, we will continue to see the fight that the Fed has to contend with on the inflation front.

Factory Orders, Durable Goods, and Industrial Production were all modestly weaker in their last reports. While employment has remained strong, many companies have announced layoffs. If the economic reports continue to show weakness, we may see even more layoffs as companies use the cover of a general environment of right sizing to give them the ability to proceed with their own layoff program. Any softness in employment will quickly translate into a slowing of consumer spending, translating into a slower economy, and will likely take the froth off of inflation; we are watching these linkages very closely.

Globally, there are a number of issues that we are looking at and any one of these items can have an impact on the capital markets. China appears to be slipping into a recession as they are having a banking crisis of their own. Given that China is the second largest economy in the world, slowness in China can certainly have a spillover effect on other economies. While discussing China, the situation with Taiwan does not seem to be getting any better. However, if China is facing economic issues, the government may be less inclined to engage in a military tussle with Taiwan. The war in Ukraine continues to drag on with no real end in sight. On the one hand, the longer the conflict drags on, it would seem to play into Russia’s hands because they are the larger and stronger country. Moreover, as this war continues, there is waning support for a protracted battle and the foreign aid needed to continue funding Ukraine’s fight. The actions by Israel in Gaza continue as Israel seeks to root out Hamas, and there are calls from many to bring this military action to an end. As I have written a number of times recently, the world is in as fragile a state as since the end of the Cold War. Stay tuned and more to come on these topics.

Domestically, we are in the throes of the Presidential election and thus far, it does not seem like Biden will be backing away from his reelection bid. At the same time, Trump is engaged in any number of legal battles – civil and criminal – and some focused on his ability to be on ballots. Although the Supreme Court has weighed in and said this is a matter for Congress and not the states, this position will likely propel the Democrats to see if they can craft legislation to bar Trump from running for President. The battle over our porous border continues, and real-world consequences of murder and crime related to illegal immigration are starting to focus more voters on law and order to control the border. I was only a young boy during the 1970s, but this is the most social unrest in the U.S. I have witnessed during my lifetime.

If markets always climb a wall of worry, we have enough worry to go around.

Until next month.