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February Economic Update

Market Summary

After a shaky start for 2024, most of the major US stock indices managed to rebound for the month of January in a similar fashion to what we saw during the course of most of last year. A handful of large capitalization stocks such as Nvidia and Meta Platforms staged double-digit percentage gains while total market breadth remained weak with small capitalization sectors lagged behind. The S&P 500 managed to post a 1.59% gain to end the month, the tech-heavy Nasdaq 100 fared the best with a 1.85% gain, the Dow Jones Industrial Average rose by 1.22%, and the small cap Russell 2000 index recorded a loss of -3.93%. (1)


The Federal Reserve

At the end of the month, Fed Chair Jerome Powell cooled expectations that the Federal Reserve would begin to cut interest rates beginning in March. This was somewhat in contrast to the sudden pivot in the Fed’s tone from December when the market began pricing-in interest rate reductions beginning in the first quarter. While the timing of rate cuts changed, Powell maintained his stance that the Federal Reserve may be able to begin lowering interest rates later this year if inflation continues to subside. (2)


Banks were once again a topic of interest as the Federal Reserve’s emergency funding facility that was established during last year’s banking strains is set to discontinue. This has renewed concerns regarding the stability of some regional banks, including New York Community Bancorp which absorbed the failed Signature Bank last year. However, the Federal Reserve has stated they are watching closely for any systemic banking issues, and none have arisen at this time. (3)


Earnings Season

Corporate earnings reports have been a mixed bag varying significantly between market sectors. Earnings reports began with the banks mid-month, which reported a year-over-year decline of -17.1% for the sector. The energy and materials sectors have lagged the most with -25.9% and -21.2% declines, respectfully. These are in sharp contrast to the best performing sectors with communications, consumer discretionary, and utilities overperforming with year-over-year earnings gains of 44.6%, 29.9%, and 29.9%, respectfully. Cumulatively, the total S&P 500 earnings return for the last quarter has fluctuated between negative and positive returns and is currently at 1.6% growth. We likely will not know whether growth remains in positive territory until most of the S&P 500 companies have reported by the end of this month. (4)


Looking Forward…

As stated throughout this newsletter, this current market rally that began last year has been propelled by a handful of large technology companies which largely benefits the S&P 500 and Nasdaq indices and has been one of the narrowest breadth rallies in history. Historically, after a market decline similar to what we experienced in 2022, the best performing sectors coming out of a major economic and/or stock market slump tend to favor the small capitalization indices such as the Russell 2000. Small cap stocks also tend to lead market returns months in advance of the broad-based S&P 500 stocks and usually serves as a confirmation signal the stock market as a whole is recovering.

 

This historical trend has not come to fruition over the past ten months where the Nasdaq and S&P 500 have rallied considerably which the Russell 2000 continues to trade sideways. An important consideration for the first quarter of this year – which will likely set the tone for the remainder of the year – is whether small cap companies are able to begin performing up to par with the large cap companies, or whether the large cap companies begin to behave like small cap companies. This current divergence is stark, noteworthy, and unlikely to continue for much longer.


 

Monthly Financial Tip:

Given the desire to travel and live well, the first few years of retirement may be expensive ones. Before and during those years, be mindful of economic and market cycles. They could affect your portfolio, and, by extension, your plans.

 

Citations:

1. WSJ.com, Dec 31, 2023

2. Federalreserve.gov Dec 01, 2023

3. Federalreserve.gov Dec 13, 2023

4. Investing.com Dec 12, 2023


Disclaimers:

This post has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. Bob Lawson is not engaged in rendering legal or accounting services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.



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