Monthly Market Commentary

These monthly market commentaries share a synopsis of the U.S. financial markets with intelligent insights.

February Investment and Economic Commentary

After the big rally in the second half of Q4 2023 across almost every asset class, the investment markets returned to their early 2023 themes.  Investors’ attention focused on the same questions: if and when the Fed will start to cut rates, will regional geopolitical issues escalate, and just how much higher can Nvidia, Microsoft, and others go?

The S&P 500 set multiple all-time highs during January, peaking at 4927.93 on January 29.  The index gave back almost 50% of its month-to-date return in the last couple of trading hours on January 31^st following Fed Chairman Powell’s news conference during which his comments dampened enthusiasm for early spring rate cuts.  The 1.7% return of the S&P 500 reflected broad performance across many sectors, though select mega-cap growth stocks such as Nvidia and Microsoft remained among the biggest contributors.  Growth outperformed value, large-cap outperformed small, domestic outperformed overseas stocks, and bonds posted modestly negative returns. 

Here are a few observations about what occurred across the public markets during the month.

Overall 

• The S&P 500 Index was up 1.7% in January.  The trailing 12-month return was 20.8% and the three-year return was 11.0% annualized.
• The MSCI EAFE Index was up 0.6% in January.  The trailing 12-month return was 10.0% and the three-year return was 4.6% annualized.
• The Bloomberg Aggregate Bond Index was down -0.3%.  The trailing 12-month return was 2.1% and the three-year return was -3.2% annualized.

Domestic Equity 

• Domestic equities largely reverted to their 2023 form, with larger cap stocks delivering modest returns.  The S&P 500 reached a new all-time high only to have half of its month-to-date gain fall off on the last day of January as the Fed tempered enthusiasm for the start of rate cuts.    
• Large Cap Growth stocks were the best performers, driven by a small number of mega-cap names.  Small Cap stocks, particularly in the value style struggled to maintain their Q423 momentum.   

International and Global Equities

• Overseas stock markets posted a range of results in the month.  Japan outperformed the US while many European markets delivered small negative returns.  Similar patterns of growth outperforming value and large beating small showed across most regions.
• China's -10.6% return in January weighed heavily on the Emerging Markets Index result.  Other emerging countries lagged in developed markets as geopolitical and economic factors dampened some of the enthusiasm entering 2024. 

Fixed Income Markets

• The bond markets may have taken a needed pause after their big Q4 rally as expectations for aggressive Fed rate cuts declined due to stronger-than-expected economic news. 

Specialty Markets 

• REITs were negatively impacted by interest rates and continuing concerns about commercial office properties.  The energy component of the commodity indexes helped overall returns.  

US Equity Sectors

• Sector returns were mixed with gains both in the higher growth Communication Services and Information Technology sectors as well as in Financials and Healthcare.  Consumer Discretionary was hurt by the large decline in Tesla, the weakest of the Magnificent Seven. 

Dear Valued Investor,

Stocks are off to a solid start in 2024. January gains are particularly enjoyable because of the adage from the Stock Trader’s Almanac, “As goes January, so goes the year.” Nearly 75 years of historical data show that when the S&P 500 rose in January, the average gain for the remainder of the year was about 12%. This January, the S&P 500 was up 1.6%.

Stocks have also historically fared well after the broad index reached a new all-time high, as the S&P 500 did last month for the first time in over two years. The average 12-month gain after a new high, with more than a 12-month wait between those highs, has been nearly 12%, with gains 13 out of 14 times.

Those new highs have prompted some to wonder if stock valuations are too rich. They’re elevated, no doubt, but they still look reasonable considering today’s interest rates. Interest rates and price-to-earnings ratios tend to move in opposite directions when rates are elevated. Big tech companies, like Alphabet, Meta, and Microsoft, are another justification for high valuations. Their impressive earnings power is the reason why earnings growth is poised to accelerate and should help prevent valuations from getting too stretched.

A soft landing for the U.S. economy, though not assured, may also help push stocks higher despite full valuations — assuming inflation continues to ease. The job market remained surprisingly strong in January, adding over 350,000 jobs as wages rose. Although that could contribute to a delay in Federal Reserve (Fed) rate cuts until summertime, markets may have adjusted to fewer cuts already. Good news may be good news.

We see a lot of merit in the bull case, but the bears have plenty to support their case as stocks attempt to continue to climb the proverbial “wall of worry” and build on year-to-date gains. Presidential elections bring uncertainty, which may add some volatility even though stocks usually rise during election years. Commercial real estate continues to plague some regional banks.

A treacherous geopolitical climate cannot be dismissed, particularly a potentially wider conflict in the Middle East. Shipping goods around the world is taking longer and costing more. Military aggression by China toward Taiwan cannot be ruled out, nor can some spillover from China’s soft economy.

In reviewing the full picture of what to expect from markets this year, a resilient U.S. economy, easing inflation pressure, and growing earnings create a favorable backdrop for both stocks and bonds. But with high valuations and mounting geopolitical risks, modest positive returns appear most likely.

Thank you for your trust in your financial journey.

Sincerely, 

Scott Krase