February 2024 Stonemark Market Commentary

Inflation Groundhog Day Déjà Vu

As Punxsutawney Phil emerged to predict an early spring, little did we know that the warmth would not be confined to the weather alone. February unfolded with surprises as economic indicators and the stock market heated up unexpectedly. Reports on Manufacturing, Services, Jobs, and Consumer Sentiment delivered shocks, but it was the Consumer Price Index (CPI) that stole the spotlight, overshadowing Phil's meteorological foresight.

In an unexpected twist, the scorching CPI release prompted investors to bid farewell to the anticipated March Federal Interest Rate cuts. Despite this, the market resiliently brushed aside the realization, propelling it to new record highs. This remarkable rebound found fuel in robust tech earnings and the steadfast momentum of the Artificial Intelligence narrative, once again showcasing the market's ability to navigate unpredictable terrains. Now, let's delve into the key events of February shaping the markets and their potential impact moving forward.

Economic Data

Economic Data revealed a still-hot US job market, with employers adding a robust 353,000 jobs in the previous month, the strongest in the trailing twelve months. Additionally, December’s figures were revised upward to 333,000 from 216,000 further undercutting the widely held view among economists that it was becoming harder to find a job.

February mirrored Groundhog Day as the unemployment rate and participation rate held steady at 3.7% and 62.5% respectively, while wages outpaced expectations. Despite positive job market news, hopes for a March rate cut dwindled, reshaping expectations until June. The bulk of hiring last year came from just three sectors: government, healthcare, and hospitality industries. However, in the latest release, job gains broadened, with nearly two-thirds of private-sector industries accounting for the increase in employment. While the report is good news for job seekers, it is a major blow to investors who were hoping for a rate cut at March’s Federal Reserve meeting.

Nevertheless, the robust labor market is instilling confidence among Americans regarding the state of the economy. Consumer sentiment experienced a noteworthy surge in January, reaching its peak since July 2021, a testament to the positive influence of the strong labor market. However, the buoyant atmosphere was tempered by the Consumer Price Index (CPI) report, revealing higher-than-anticipated inflation in January. The persistence of elevated shelter prices, as highlighted in the monthly release from the Labor Department, continues to exert pressure on consumers. Excluding the impact of volatile food and energy prices, the core CPI accelerated by 0.4% in January, maintaining a year-over-year increase of 3.9%, a figure unchanged from December and slightly surpassing the forecasted 0.3% and 3.7%, respectively.

The Federal Reserve's preferred metric, the Personal Consumption Index (PCE), revealed a concerning trend as overall consumer prices experienced an uptick, posing challenges to the Fed's envisioned "soft landing" scenario. According to the Commerce Department, consumer prices rose by 0.3% in January compared to December, aligning with expectations, and registering a 2.4% increase from the previous year. Despite a notable deceleration in January, real U.S. personal consumption spending maintained a robust growth trajectory on a 3-month annualized basis. This data aligns with a disconcerting "no landing" scenario, diverging from the Fed's preference for a "soft landing." While some economists interpret this report as a temporary deviation from the broader disinflation trend, the evidence suggests that inflation may persist longer than initially anticipated, warranting close monitoring in the coming months.

Given the robust economic data, it comes as no surprise that Federal Reserve officials exhibit a measured approach, showing no urgency to implement interest rate cuts in the immediate future. This sentiment is reaffirmed by the recently released FOMC minutes, revealing a collective awareness among participants of the potential risks associated with hastily easing the current interest rate. Maintaining a steady course, officials have upheld their benchmark federal funds rate within a range of 5.25% to 5.50% since last July. Chairman Powell emphasized the need for additional evidence that inflation is converging toward the Fed's targeted 2% goal. In a televised interview last month, he clarified that incoming data doesn't necessarily have to surpass previous figures but simply needs to meet a certain threshold of goodness.

Economic Forecasts

Despite the Federal Reserve's efforts to curb economic activity, markets achieved unprecedented highs in February, driven primarily by the tech sector, notably Nvidia, which fueled further excitement surrounding artificial intelligence. The surge can be attributed to the overwhelming demand for Nvidia's AI GPU chips, propelling its Data Center revenues to an impressive $18.4 billion, quintupling year-over-year. Nvidia's meteoric rise draws parallels to the tech stock surge during the internet bubble of 1999, though crucial distinctions exist. In contrast to the dot-com era, contemporary companies, including Nvidia, boast substantial profitability. Notably, the enthusiasm today is concentrated on a select few major players, diverging from the widespread participation observed in the late 1990s. While the valuations of companies like Nvidia may not necessarily resemble a bubble, they are approaching levels that warrant prudent caution, emphasizing the need for careful consideration in the current market climate.

Consequently, propelled by robust economic indicators and the promising growth prospects fueled by artificial intelligence (AI), the Conference Board has steered away from its recession forecast for the first time in over a year. Justyna Zabinska-La Monica, a spokesperson for the group, emphasized, "While the declining Leading Economic Index (LEI) continues to indicate headwinds to economic activity, an encouraging shift has occurred. For the first time in the past two years, six out of its 10 components were positive contributors over the last six months, concluding in January 2024." She elaborated, stating, "Consequently, the LEI currently does not foretell an impending recession. Although the recession forecast for 2024 has been rescinded, we anticipate a deceleration in real GDP growth to near zero percent during Q2 and Q3."

In January 2024, the Conference Board Leading Economic Index for the U.S. registered a 0.4 percent decline, reaching 102.7 (2016=100), following a 0.2 percent drop in December 2023. Over the critical six-month period spanning from July 2023 to January 2024, the LEI contracted by 3.0 percent, representing a more moderate decrease compared to the 4.1 percent decline witnessed in the preceding six months. This nuanced change in trajectory underscores the evolving economic landscape, with cautious optimism prevailing amidst the complexities of the current economic environment.


The encouraging news lies in the existence of a viable path toward achieving the Federal Reserve's 2% inflation target. However, the less favorable aspect is that the timeline for attaining this goal may extend beyond investors' desired horizon. The persistence of higher-for-longer interest rates underscores the current reality, and sectors susceptible to elevated financing costs will bear the brunt of the prevailing tight monetary policy. Conversely, sectors less sensitive to interest rates, strategically positioned to capitalize on the ongoing substantial fiscal deficits, find themselves on solid ground. This advantageous group includes thriving technology stocks scaling new all-time highs, healthcare stocks experiencing unprecedented peaks, defense and aerospace stocks reaching historic levels, and segments such as travel and dining, exemplified by American Express and Booking Holdings hovering at or near all-time highs. Essentially, these sectors align with the spending patterns of the upper-middle class and retirees, further fortifying their stability.

The robust performance of sectors bolstered by fiscal deficits poses a direct challenge to weaker sectors, as the former's strength sustains the overall economy, limiting the Federal Reserve's leeway to loosen monetary policy for the latter. The absence of a quick remedy implies that a collective breakthrough is essential, holding potential consequences for all stakeholders. As the U.S. increasingly adopts a fiscal-driven protectionist industrial policy characterized by high nominal growth, investors are advised to adopt a Groundhog Day mindset, and lean into the sectors that will directly benefit for the foreseeable future.