March Economic Update
Market Summary
The major US stock indices had somewhat of a choppy month in February but managed to post into positive territory. Of note was the more rounded gains between various sectors which is a change from what we saw most of last year when only a handful of large capitalization companies were raising the big cap indices. The S&P 500 rose 5.17%, the Nasdaq 100 Index added 5.29%, and the small cap Russell 2000 index gained 5.52%. (1)
Inflation and Interest Rates
There have been some recent signs that inflation may stick around for longer than expected. The Consumer Price Index (CPI) released in both February and March showed headline inflation 3.1% and 3.2%, respectively. While this is far lower than peak inflation of 9.1% in July 2022, it is also the eighth consecutive month that CPI has stay in the 3% range. Because of this, expectations of three or more interest rate cuts by the Federal Reserve this year have been pulled back with the markets currently pricing-in only one or two rate cuts. (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. (2)
In the meeting minutes released by the Federal Reserve last month, the Committee noted that they will need to see sustained and convincing progress on the inflation front before acting upon lowering interest rates. The primary concern by the Fed is making the same mistake that took place back in the late 1970s and early 1980s when inflation spiked, retreated, and the Fed made the mistake of claiming victory too soon and lowering interest rates, only to have a second inflation surge a couple years later. Lowering rates too quickly could result in a similar outcome this time around, so we do expect interest rates to stay elevated for some time to come – likely into 2025 with only minor cuts by the Fed. (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…
In the wake of the upward market movements since November, it’s hard to make the case that the markets are not overpriced. Historic price-to-earnings ratios for the S&P 500 – used a measurement of stock or index price relative to corporate earnings – are between 16-18. Current P/E ratios are nearing all-time highs rivaled only by the pre “Dot Com” bust in 2000 and back in 2021 before the market corrections the following year. While valuations can stay elevated for longer than most analysts can typically predict, it would not surprise us to see another 5-15% downside correction in the coming months as we enter into a seasonably weak period of time for markets.
Monthly Financial Tip:
Once a year, you should look at your insurance policies (life, disability, any others) to see if your coverage has any weak spots or if you can find better rates with another company.
Citations:
1. WSJ.com, February 29, 2024
2. Bls.gov/cpi, March 12, 2024
3. Federalreserve.gov, Feb 21, 2024
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.
