Market Memo | March 2024

The stock market was all roses in February.

The S&P 500 index was up 4.10% for the month, extending its upward run. With returns of over 20% in the last 12 months, the lack of love for the market seems unreasonable. In a potential sign of gathering strength, the market was led by sectors other than Information Technology and Communications. The Consumer Discretionary sector led the market higher for the month, up 8.71%, followed by Industrials up 7.23%. Even the Materials sector ended the month with a gain of 6.46%, ahead of Communication and Information Tech, the two best performing sectors over the past 12 months.

The Russell 3000, a small and mid-sized company stock index slightly outpaced the S&P as well, up 5.41% for the month. The market has been incredibly resilient in the face of higher interest rates, inflation, and multiple wars. A large part of this is due to the trillions of dollars governments pumped into economies around the globe, but some can be traced to shifting leadership in company financials.

For years, fixed assets such as property, plants, and equipment were the bulk of the assets on balance sheets. That dynamic continues to shift as market leading companies deal more with intellectual property and services that can be delivered just about anywhere at any time without large incremental investments. The App Store is a great example of this; Apple can rake in profits at all hours and around the globe without the need for an extensive retail or wholesale network and the expense associated. This shift makes a company, like Apple, less sensitive to interest rate changes.

Trillions in government spending is a concern for the bond market.

This is ultimately leading investors to demand higher yields. The Bloomberg Aggregate Bond index ended down 1.70% for the month. The market has been dialing back rate cut expectations and is now more in line with the Federal Reserve’s (Fed) outlook for fewer cuts in 2024. The bond market and the stock market are seeing the same things, continued GDP growth, a surprisingly strong labor market, and increases in productivity.

While this strength is helping the stock market, it is hurting the bond market. The stronger the economy, the longer it will be before rate cuts happen. Some economists are starting to question if rates should be cut at all this year, given the economic strength. But not everyone feels like the economy is as great as economists tell us it is. Sticker shock at grocery stores and restaurants continues to be an issue as does affordability for housing and transportation. The latter two have been compounded higher by the cost of borrowing. The Fed has indicated rate cuts are coming and it would be surprising if the year ended with none, particularly in an election year.

In other markets, stocks in Emerging Markets outpaced Developed Economies.

The MSCI EM index returned 4.76% compared to the MSCI EAFE index return of 1.83% for the month. The slowdown in China has continued and hope for large stimulus measures are fading. It was just a few weeks ago that analysts were expecting a direct intervention in the stock market, and within the last few months that rumors of stimulus packages worth $250 billion were being discussed. Increased tensions with Tawain and the Philippines, and less stimulus doesn’t bode well for investors in China given the real estate, debt, and banking issues within their economy. Stocks in China have lost over $6 trillion in value since 2021, according to research from Bloomberg. The slowdown has helped reduce inflation in many sectors of the economy. Reduced commodity purchases by such an enormous buyer have increased supply, cooling inflation.

In developed economies, Japan has had a good run to start the year, while Germany is near if not in a recession. The Eurozone in general will continue to be a tough environment as long as the war in Ukraine rages on.

Gold and silver continue to have demand.

Whether it’s due to it’s as a safe haven from current geopolitical conflict or from Central Bank buying as more countries look to circumvent the dollar. Gold moved up 2.00% for the month and seems to be poised for a further breakout due to the previously mentioned ballooning debt burden governments around the world are creating in addition to geopolitical concerns.

A variety of factors are pushing the US stock market higher.

This includes the US growth in corporate earnings, growing GDP, low unemployment, increased productivity along with artificial intelligence and an uptick in manufacturing. We continue to favor the US relative to other developed or emerging market economies and would like to see a continuation of the broadening experienced in February. Cash and Fixed Income yields continue to be attractive for those with less of a risk appetite. The upcoming elections will start to come into focus more throughout the remainder of the year and could impact sentiment in the stock market and economy overall. Other risks continue to be spillover effects from the wars in Israel and Ukraine, inflation, and the interest rate response from the Fed to inflation data. However, for the month of February, Cupid’s arrow certainly wasn’t needed to help investors fall in love with the stock market.