March 2, 2024
February 2024 Market Commentary
For the past year market sentiment, and continued market advances, relied primarily on the belief that interest rates would begin to decline in 2024, driving the market higher. As the year began to unfold the outlook changed somewhat. Sustained economic strength increasingly led market observers to conclude that interest rate declines would come more slowly and less frequently in 2024 than was previously thought. Expectations are still that rates will decline, but perhaps only with three rate cuts in 2024, with declining short-term rates falling by no more than 1 percentage point.
As January closed this caused a brief disruption. After beginning the year with gains, the market began to sell off as January ended. However, as we moved into February, the psychology shifted. If the economy continued to demonstrate strength, and rate cuts would be more modest, then further advances would continue to come, based on increased earnings, and not simply from the reliance on lower rates.
Whether things continue to play out with this newly adopted view, or a market correction of 10% or so takes place, remains to be seen. For the time being, the bias continues to favor further advances.
Two other trends are beginning to emerge. First, gains continue to be somewhat narrow, focused on the “Magnificent Seven,” tech stocks that control AI (Artificial Intelligence). Since they now make up about one-third of the S&P 500, that index also continues to move higher. The other 493 stocks, the broader equity market, and international stocks, while still advancing, are doing so at a more modest pace.
Second, the expectation that higher rates will be more protracted, has led to a decline in fixed income. The US Aggregate Bond Market is off by -1.9% by February 29. Even short-term fixed income has sold off, albeit less dramatically. The Vanguard Short-Term Bond ETF (ticker BSV) is off by -0.6% YTD.
January 31, 2024
January 2024 Market Commentary
Momentum and optimism drove the market higher for most of January, until reality came crashing in today, when the US Federal Reserve announced that while it had stopped raising rates, cuts where not foreseen for the present time. The market, having expected multiple cuts amounting to as much as 1.5% from present levels in 2024, took the news poorly. On the last trading day of the month about half of the prior 30 days of advances disappeared in about two hours.
January’s advance in equities had been concentrated in the large cap S&P500, especially in a small number of the very largest tech firms until recently referred to as the “Magnificent Seven”. Otherwise known as Alphabet (Google), Amazon, Apple, Meta (Facebook), Microsoft, Nvidia and until recently Tesla. The disproportionate impact of this group can be seen by the fact that these seven stocks alone represent fully 33% of the market capitalization (dollar value) of the S&P500. Half as much as the remaining 493 stocks.
The impact of this trend is noticed even more in the NASDAQ Composite. Through January 29 the NASDAQ had advanced by 4.1% for the year. In the final two days of the month, as weaker than expected tech earnings were announced, the NASDAQ lost three quarters of this YTD gain, declining to a YTD gain at the January 31 close of just 1%.
For the month bond markets mostly went sideways. The yield on the US Ten Year Treasury increased by a quarter point through January 24, before ending the month with a yield of 3.92%, within 2 basis points (2/100ths of 1%) of where it began the month. Short-term bonds (maturities from 1 month to 2 years) tended to do better, with minor gains, as they “roll down the yield curve”, generating higher prices as short-term rates continue to decline.
December 30, 2023
December 2023 Market Commentary
Markets finished the year with very strong advances, given expectations of several rate cuts by the Federal Reserve in 2024. Since October the S&P 500 advanced from a YTD Gain of 9.2% to end the year with a 24.2% return. Meanwhile, the Aggregate US Fixed Income Market (as represented by AGG, the iShares Aggregate Bond ETF) advanced from a YTD Loss of -4.8% in October to a positive gain of 2.3% by year’s end. The S&P 500 finished 2023 at 4769.83, just shy of its all-time high of 4797.
After starting the year with a yield of 3.74%, the US 10-Year Treasury steadily increased to a momentary peak of 5% on October 19, before ending the year at 3.84%, only 10 basis points above the level where it began the year.
Going into the year expectations were that a recession would occur in 2023. This prediction proved to be completely incorrect. On the contrary, the economy advanced throughout the year, inflation declined, and the unemployment rate remained low. This underlying strength in the economy, and the positive impact on corporate earnings, also served to provide a solid foundation for market advances.
Looking forward the near-term momentum continues to point to further advances. However, the primary risk for 2024, in addition to geopolitical concerns and the coming Election, is that expected rate cuts may not come as quickly and as significantly as pundits expect.
December 1, 2023
November 2023 Market Commentary
Markets in November can be summed up quite easily. Declining inflation led to a significant reduction in bond yields, which simultaneously led to advances in stock prices. During the month, the Consumer Price Index (CPI) was unchanged from October, largely due to falling gasoline prices. On an annual basis, the CPI increased by 3.2% as compared to October 2022. The improving economic picture resulted in a decline in bond yields from mid-October when the US 10-year Treasury peaked at 5%. Within six weeks the yield on the 10 Year fell to 4.33% by November 30. Meanwhile, stocks advanced, with the S&P 500 increasing from a YTD gain of 9.2% in October to 19.0% on November 30.
The improving picture on inflation led market observers to conclude that interest rate increases by the Fed are over, and falling yields are predicted for 2024. If the inflation picture looks hopeful once again in December, we should expect a “Santa Claus Rally” with continuing advances by stocks and falling bond yields. As the focus shifts to 2024 and next year’s Election, the key factor will be whether the Federal Reserve does follow through with interest rate cuts, or if rates prove to be “higher for longer”. The former scenario sets the stage for continued positive results. The latter with more pessimistic results for both stocks and bonds.
Meanwhile, the wild card that could throw everything into disarray is geopolitical developments. Russia will likely be emboldened, hoping for a Trump Victory in November, leading to continued conflict in Ukraine. Meanwhile, indications are that Israel is planning a comprehensive war in Gaza that will last for at least another year, which introduces the threat of an escalating conflict in the Middle East. Asian experts discount the possibility of a Chinese invasion of Taiwan, but observers will continue to keep a close eye on developments in China and continued tensions with the United States. Finally, domestic developments could loom large as the Election nears and Trump’s many legal woes go from developing cases to possible convictions and prison sentences. A “Black Swan” domestic event in the United States could have unforeseen consequences. In short, non-economic factors could overshadow more mundane economic issues, such as inflation, interest rates, bond yields, and stock valuations.
November 2, 2023
October 2023 Market Commentary
Stocks continued to decline in October, though more modestly compared to the prior month. The S&P 500 fell by about 2.5% during the month. Fixed Income also declined, with the US Aggregate Bond Market off by about 1.9%. The yield on the 10-year US Treasury briefly exceeded 5% before declining slightly by month’s end.
Investors continued to worry about the spending power of the US Consumer, which seems to be driven by the spending of funds accumulated during pandemic-era fiscal stimulus programs. The question now is how long the consumer can continue spending before being forced at some point to cut back. This concern has also raised fears that corporate earnings will slow. Investors adopted a pessimistic outlook and continued to pull funds from both the equity and fixed-income markets.
As we enter November both equity and fixed-income markets advanced as the US Federal Reserve opted to keep interest rates unchanged for a second time. The question now has shifted from whether the Fed will continue to raise rates to the length of time rates will remain elevated. While the outlook for stocks remains mixed, fixed income may now be poised for future gains.
In the past two years, the US Aggregate Bond Index fell by nearly 20%, and long-dated Treasuries (maturities over 20 years) declined by a whopping 42%. Increasingly though these declines may be behind us, as the Fed has largely completed rate increases designed to bring down inflation. We may now be witnessing the first significant buying opportunity for bonds in several years.
October 2, 2023
September 2023 Market Commentary
After hitting a plateau in August stocks sold off in September. A combination of factors turned sentiment negative, including a hawkish Federal Reserve, that signaled its intent to keep interest rates “higher for longer,” the threat of a potential government shut-down, steadily increasing bond yields, and rising oil prices. For the month, the S&P 500 lost ground, with the YTD advance falling from 19.5% in July and 17.8% through August to an 11.7% YTD gain at the end of September. Globally, the MSCI ACWI (Morgan Stanley All Cap World Index) fell from a 17.7% YTD gain in July to a 14.7% advance in August and declined a 9.6% gain by the end of September.
The steady advance in bond yields, which began in April resumed and accelerated in September. The US 10-Year Treasury saw yields increase from 4.11% in August to a new peak for 2023 of 4.58% on September 30. As we enter October yields continue to rise with an increase to 4.67 with about two hours left in the trading day. Bonds now offer a solid investment opportunity, with elevated short-term rates, and the possibility of “rolling down the yield curve,” particularly for investors purchasing mid-to-longer-term bonds now, before rate decreases perhaps begin to be seen later in 2024 and beyond.
The economy continues to hold up, with historically low unemployment rates, despite significant increases in short-term rates. Meanwhile, inflation (overall) continues to slow, with the occasional exception, such as elevated oil prices in September.
With September behind us, the market is likely reaching its near-term bottom, and could reverse course with increases coming in October (a historically strong month) and towards year-end in the event of a “Santa Claus rally.”
Peter Gaylord, CFA
Gaylord Wealth Management, LLC
Rocklin, CA