February continued the positive market performance. All indices participated in the upside as the market broadened out to sectors other than Technology. Both the S&P 500 and NASDAQ hit all-time highs. Q4 earnings season is close to complete. U.S. earnings growth is +8% year over year as companies have beat expectations, and revenue growth is up +4% year over year. Consumer Discretionary +7.6%, Materials +5.7% and Industrials +5.5% drove February performance. Small-caps are still lagging.
S&P 500: Feb +5.17% YTD +6.84%
DOW: Feb +2.22% YTD +3.47%
NASDAQ: Feb +6.12% YTD +7.20%
Russell 2000: Feb +5.46% YTD +1.31%
Sector Performance YTD:
Communication Services +10.8%
Consumer Discretionary +4.7%
Consumer Staples +3.5%
Energy +2.0%
Financials +7.0%
Healthcare +6.0%
Industrials +6.0%
Materials +2.1%
Real Estate -2.5%
Technology +10.3%
Utilities -2.6%
Current U.S. Treasury Yields:
6 Month Bill 5.29%
2 Year Note 4.63%
5 Year Note 4.21%
10 Year Note 4.23%
30 Year Note 4.35%
The Fed and the Economy:
Fed Chair Powell will be speaking on Wednesday. Powell will get asked by reporters, looking for a definitive rate cut timeline, when will cuts begin. Rate cuts are clearly off the table any time soon. Personal Consumption Expenditures Price Index (PCE) for January increased 0.4% (excluding food and energy) from December. This was in line with inflation expectations and strengthens the Fed stance of going slow on rate cuts. It also benefits stocks as evidenced by more cash rolling out of Money Market funds and into equities. Interestingly, Money Market funds have still been adding deposits, hitting $6.06 trillion to end February. The funds are coming from bank deposits with lower yields. GDP advanced 4.9% in Q4, exceeding the estimated 2% increase.
The labor market remains tight. Consumers are still spending, albeit less so, and personal savings ticked up. Sales of existing homes rose 3.1% in January, while new home sales increased 1.5%. Mortgage rates ended the month at 7.55% for a 30-Year Fixed.
Germany is still struggling and in recession. The UK’s inflation rate remained unchanged at 4%. France is cutting spending as it anticipates a weaker economy. Eurozone inflation fell to 2.6%, well down from its high of 10.6%. China’s real estate woes continue and add to its deflation, unemployment, and declining exports issues. Japan’s stock market hit a high not seen there for 34 years. However, it’s economy has technically entered recession. The country not only has an aging population but a shrinking one. A weak yen is eating into export profits.
Looking Forward:
We anticipate that the stock market will continue to perform well. The broadening out of sectors adding to positive performance, other than just Technology, will gain traction. The market seemingly has put rate cuts out of the analysis and has focused on earnings and forward guidance. Both have been excellent. Money Market fund yields are still delivering almost 5% interest, and coupled with stocks, make bonds and duration less interesting. Global issues have potential to disrupt the current market momentum. Barring any, there will be normal volatility with an upward bias. We are optimistic for a positive year.