March 2024 Newsletter

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Read March 2024 Market Insights

Despite the disappointing January CPI and PPI data in February, we do not interpret it as indicative of a lasting trend of elevated inflation. The headline CPI registered at 3.1% year over year, slightly surpassing forecasts of 2.9%, yet still lower than December’s 3.4%. Core inflation, excluding food and energy, persisted at 3.9% year over year, in line with December’s figures and surpassing expectations of 3.7%. In the CPI report, while some categories, like energy and used cars, saw a moderation in inflation, others such as food and dining out experienced increases. Particularly noteworthy was the rise in shelter and rent, constituting a significant portion of CPI. However, real-time data suggests these trends may cool in the coming months. We anticipate CPI to decline to around 2.5% over the next year, supporting consumers and possibly prompting the Fed to consider rate cuts.

January’s higher-than-expected inflation prompted a revision in market forecasts for Fed rate cuts. Anticipated rate cuts reduced from around five to about four, possibly starting in June. We believe this adjustment aligns better with the Fed’s stance and our forecast of three to four rate cuts beginning mid-2024. The Fed may wait to observe inflation trends before acting.

The stock market continued its upward trend last month, marking a 24%+ increase since October and reaching record highs. This sustained rally is supported by positive factors such as anticipated Fed rate cuts and strong consumer activity. Stocks extended their gains last week, now showing a more than 6% increase since the beginning of 2024.

Corporate Earnings Reports

While the current market rally is strong, it’s not without its risks. Tech-driven leadership and high valuations raise concerns, alongside uncertainties about the Fed’s ability to balance economic growth and inflation. However, we believe the market still has room to grow, backed by solid earnings. Historically, market performance aligns with corporate earnings, which have been trending upward, providing confidence in the market’s resilience. The recent stock market surge hinges on strong corporate earnings in 2024, following a year where earnings grew slightly while the market soared. So far, fourth-quarter earnings have beaten expectations by over 7%, with S&P 500 profits rising 6.8% year-over-year, providing a positive start for the new year.

Market Concentration and Sensitivity

The top 10 stocks in the S&P 500 now hold about 29% of the market’s capitalization, compared to 33% during the dot-com era. Last year, the market’s gains were driven largely by a few mega-cap tech stocks, increasing market concentration and vulnerability to swings in sentiment and sector-specific risks.

Adjusted Expectations for Fed Policy

Market volatility has often been influenced by expectations surrounding Fed interest-rate decisions. While markets previously anticipated rate cuts starting in March, recent adjustments align more closely with our forecast of rate cuts beginning in the summer. Despite these adjustments, the stock market has remained relatively stable, signaling a willingness to consider the broader economic landscape.

Market Responses to Previous Fed Adjustments

Looking back at 2023, abrupt changes in Fed expectations led to significant market corrections. For instance, in February, hawkish Fed commentary raised rate expectations, causing a 7% market decline. Similarly, a “higher for longer” rate message in the summer prompted a 10% correction. These historical instances demonstrate how prior adjustments to higher rates have affected equity markets.

End of All-Time-Highs?

Despite lingering uncertainty over market reactions to Federal Reserve expectations, the recent market response, accepting the Fed’s delayed rate-cutting timeline without significant sell-offs, indicates growing confidence in broader market fundamentals. Achieving record highs, the stock market’s recent surge marks a new bull market with substantial returns since January 2022. Historical data suggests that hitting all-time highs typically signals further potential gains rather than signaling the end of bullish momentum, with equities often experiencing robust and prolonged growth phases following such milestones.