Monthly Market Commentary

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

March Investment and Economic Commentary

Throughout February, the US equity markets climbed higher and higher, with the S&P 500 setting new all-time highs multiple times during the month.  While largely powered once again by mega-cap technology names such as Nvidia and Facebook and a surging Eli Lilly, the equity markets had a greater breadth and improved returns across many segments.  The positive returns came despite a steady rise in interest rates across the yield curve as the bond market responded to signals that the expected Fed rate cuts may be further out and fewer in number than may have been anticipated. 

Though value stocks generally trailed growth stocks, they recovered nicely from a sluggish January.  Similarly, small caps had a strong month, particularly small cap growth, highlighting the greater market breadth.  Overseas stocks continue to lag the US, though notably Japanese stocks have shown a resurgence recently.  The bond markets were negatively impacted by the increase in interest rates as economic data pointed to stronger growth and stable inflation readings.    

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

Overall

• The S&P 500 Index was 5.3% in February.  The YTD return was 7.1% and the one-year return was 30.5%.
• The MSCI EAFE Index (Europe, Australia, Far East) was 1.8% in February.  The YTD return was 2.4% and the one-year return was 14.4%.
• The Bloomberg Aggregate Bond Index was -1.4% in February.  The YTD return was -1.7% and the one-year return was 3.3%.

Domestic Equity

• Domestic equities continued to surge to new highs as the tech-heavy Nasdaq composite index and S&P 500 broke records on the last trading day in February. Markets were bolstered by companies across all sectors in February, with shares of chipmakers and AI stocks leading the way. Additionally, fresh data showing progress on inflation helped propel the markets forward.
• Growth stocks greatly outperformed value stocks, largely driven by the surge in AI-related companies that have dominated headlines. Mid-cap stocks emerged as the top performers due to rapidly growing companies such as Celsius, Super Micro Computer, and e.l.f.

International and Global Equities

• Foreign stocks posted positive returns but underperformed US stocks in February. U.S. tech gains lifted tech stocks globally, and a rally in chipmakers helped Japan’s Nikkei set a record for the first time since 1989.
• Emerging markets rebounded in February. China saw an inflow of capital as investors viewed the strategic market positions and compelling valuations of its market as outweighing the current geopolitical and economic concerns.

Fixed Income Markets

• The bond market continued its decline to the start of the year due to investors roughly halving the number of cuts they expect the Federal Reserve to deliver in 2024. Booming job growth and persistent inflation have made the U.S. central bank hesitant to ease monetary policy too soon.

Specialty Markets

• REITs posted positive returns in February after falling sharply in January, as investors search for value. Commodities posted a negative return led by falling crude oil prices and soybean futures.

US Equity Sectors

• All the 11 major sectors of the S&P 500 generated positive returns in February, led by Consumer Discretionary and Industrials, Materials, and Information Technology.

Dear Valued Investors,

As spring approaches, the weather is starting to warm up. For the stock market, the temperature has been rising for a while now. In fact, since December 2023, the S&P 500 has not experienced a pullback of even 2%. Strong starts to years tend to signal more gains ahead, so this calm market may not precede a storm. When the S&P 500 has been up in January and February, it has gained an average of 11% over the rest of the year and has been higher in 26 out of 28 cases. 

Here’s some more good news. The market’s process of adjusting to fewer interest rate cuts from the Federal Reserve (Fed) could be mostly over, with the Fed and the bond market generally aligned on the path of rates. Some upward pressure on yields is possible as this debate evolves and some components of inflation remain sticky, but with rate cuts forthcoming, there is a limit to how much higher rates will go. Stable interest rates can help support lofty stock valuations and reverse early-year losses in the bond market.

An excellent fourth-quarter earnings season provides additional support for stock valuations. The mega-cap technology companies were the stars of the show, as the biggest six technology companies drove more than nine points of S&P 500 earnings per share growth in the quarter by themselves – turning a 4.5% decline into a nearly 5% earnings increase. That’s doing some heavy lifting. Prospects for high-single-digit earnings growth for the S&P 500 in the year ahead have brightened, though gains will be dependent on the U.S. economy achieving a soft landing. In the absence of a recession, stocks have a strong track record of gains.

Against the odds, the Fed may have threaded the needle. Government spending has helped, enabling the economy to sustain itself late in its cycle. We’ll be watching the economic data, credit markets, and various measures of investor sentiment for signs of deterioration. A broadening out to the “S&P 493” would be welcomed. Pairing technical analysis with fundamentals will be especially important.

History does suggest volatility may pick up after such a strong and steady advance. Although the S&P 500 has returned over 11% annualized since 1980, on average, the index typically experiences one 10% correction per year and three 5% to 10% pullbacks. A divisive presidential election now just eight months away could bring more volatility, as could geopolitical tensions or weakness in the mega-cap technology stocks

Here’s hoping for a warm — but not too hot — spring for the economy and markets, keeping Fed rate cuts in play while providing a solid foundation for corporate America to grow earnings.

Sincerely, 

Scott Krase