March 2024 Stonemark Market Commentary

At the beginning of 2023, the prevailing sentiment among investors was bracing for an imminent U.S. economic deceleration, potentially accompanied by a series of Federal Reserve rate adjustments. However, fifteen months down the line, while global economies, notably in the U.K., Ireland, Japan, and Germany, grapple with downturns, the resilience of the U.S. economy stands out prominently. Contrary to expectations of a hard or soft landing, the U.S. has demonstrated remarkable buoyancy, with no landing at all.

The fervent momentum witnessed in the U.S. stock market at the outset of 2024 is emblematic of this resilience, with the S&P 500 surging by over 10% in the first quarter, marking its fifth gain in the last six quarters. This achievement represents the second consecutive double-digit quarterly percentage gain and the most auspicious performance since 2019. Although the Nasdaq narrowly missed securing its fourth double-digit percentage gain in the last five quarters, its quarterly gain of 9.4% underscores the robustness of the market.

Driving this current surge are several mega cap companies, which have maintained their trajectory from 2023. Notably, Nvidia's stellar performance, with an astounding surge of over 80% year-to-date, propelled by its industry-leading AI chips, exemplifies the enduring strength of technological innovation. Similarly, Meta Platforms has emerged as a formidable contender, experiencing a 37% surge, buoyed by its inaugural dividend issuance in February.

However, the scope of this rally goes beyond the tech giants, demonstrating a growing investor interest in diverse opportunities. The Tech and Communication Services sectors, which together account for five of the Magnificent Seven, are among the top-performing sectors of the S&P 500 so far this year. Additionally, the energy, financials, and industrials sectors are outperforming the index, indicating broader market participation and anticipation of upcoming interest rate adjustments. The timing of interest rate cuts depends on economic data, and March had investors feeling uncertain.

As we transitioned from Winter to Spring, the initial economic data release presented was a curveball to investors, akin to uncovering unexpected treasures within a box of Cracker Jacks. While February saw job creation surpassing expectations, the accompanying rise in the unemployment rate and revisions to the previous month's job growth figures tempered the initial enthusiasm. Nonfarm payrolls surged by 275,000 jobs, exceeding consensus estimates by 75,000 and showing a 20% increase from January. However, downward revisions to January and December figures underscored potential future challenges, hinting at a softening in job growth momentum. Notably, the services sector drove a significant portion of private job gains, while the goods-producing sector experienced deceleration, with manufacturing witnessing a net loss of 4,000 jobs.

In a further twist, the unemployment rate unexpectedly rose by 20 basis points to 3.9%, reaching its highest level since January 2022, even as labor market participation remained steady. Moreover, the average duration of unemployment increased to 20.6 weeks in February, reflecting prolonged job searches for some individuals. These nuanced insights contribute to the ongoing speculation regarding the Federal Reserve's interest rate trajectory, as interpretations of the data range from recession fears to perceptions of economic stability.

Adding to the complexity, the inflation report revealed a consecutive monthly increase, with the consumer price index (CPI) rising by 0.4% and the core CPI, excluding volatile food and energy prices, also experiencing a 0.4% increase. Both figures surpassed expectations by one-tenth of a percentage point, primarily driven by higher costs for gasoline and shelter. This persistent inflationary pressure diminishes the likelihood of an imminent interest rate cut by the Federal Reserve before June, as indicated by the Federal Reserve's preferred metric, the Personal Consumption Expenditures (PCE) index. February's PCE inflation exceeded economists' expectations, indicating a 2.5% increase over the previous 12 months.

Despite these challenges, Federal Reserve officials maintain a cautiously optimistic outlook, affirming their commitment to managing inflation while supporting economic stability. Chairman Powell reiterated the committee's intention to implement three interest rate cuts in 2024, with 10 of the Fed's 19 officials projecting a reduction of at least three-quarters of a percentage point by year-end. This slightly revised stance reflects a nuanced assessment of economic conditions, with some officials advocating for a measured approach to rate adjustments. Looking ahead, the median expectation among policymakers suggests a gradual reduction in the Fed's benchmark overnight interest rate, emphasizing the importance of balanced monetary policy amidst evolving economic dynamics.

While market sentiment sometimes interprets positive developments with caution, particularly in anticipation of prolonged interest rate stability, it's undeniable that the U.S. economy continues to demonstrate remarkable strength. Recent data from the Commerce Department revealed upward revisions to fourth-quarter growth figures, driven by robust consumer spending and increased business investment in nonresidential structures such as factories and healthcare facilities. Moreover, corporate profits showed a solid uptick last quarter, a trend fueled by nonfinancial corporations. This confluence of factors, alongside a notable rise in worker productivity, bodes well for sustaining employment levels and prolonging the economic expansion.

Despite concerns over a potential recession amidst the Federal Reserve's efforts to curb inflation through substantial interest rate hikes totaling 525 basis points since March 2022, the U.S. economy has remained resilient. Revised figures indicate a 3.4% annualized growth rate in the last quarter, surpassing previous estimates of 3.2%. Notably, this growth rate exceeds the 1.8% threshold considered by Fed officials as non-inflationary. With growth rates of 4.9% and 2.5% in the preceding quarters of 2023 and the overall year, respectively, the U.S. economy has outpaced global counterparts, albeit with a moderated pace forecasted for the first quarter of 2024, estimated at around 2.0%.

The optimism surrounding the U.S. economic outlook is echoed by the Conference Board's latest assessments. Their Leading Economic Index for the United States experienced its first uptick in two years, propelled by increased factory hours worked and a buoyant stock market, among other factors. While some indicators still hint at potential obstacles to growth, such as consumer expectations and new orders for U.S. manufacturers, Justyna Zabinska-La Monica, Senior Manager for Business Cycle Indicators, notes that the Conference Board anticipates a deceleration in annualized GDP growth over the Q2 to Q3 2024 period. Factors such as rising consumer debt and elevated interest rates may exert pressure on consumer spending, despite the recent positive trends.

As investors gaze into the horizon, they eagerly await the unfolding narrative of equities and whether the current bullish trajectory will persist throughout the year. With expectations of interest rate cuts looming as early as June, the ongoing rally could potentially gain additional momentum. Surpassing the 5,200 points milestone well ahead of projections by prominent brokerages, which were originally slated for year-end, highlights the fervent pace of market ascent, sparking contemplation among market participants about its implications for the remainder of the year.

Drawing insights from historical data provides valuable context for navigating these market dynamics. Analysis reveals that following first-quarter gains exceeding 10%, the S&P 500 surged higher in the subsequent quarter 9 out of 11 times, with an average gain of 5%. Moreover, the index trended upwards for the rest of the year in 10 out of 11 instances, registering an average gain of 11%. Notably, even in instances where pullbacks occurred, the market predominantly closed higher by year-end, with the maximum pullback averaging 11%. While historical data serves as a foundational reference, it underscores a consistent pattern: robust first-quarter returns often herald prolonged market gains, aligning with broader studies indicating that strong price momentum characterizes bullish market cycles.

In light of these observations, investors are advised to align with the prevailing market trend, which remains upward. Recognizing pullbacks as inherent to market dynamics, investors can leverage these periodic retractions as opportunities to capitalize on favorable entry points. As we navigate the unfolding chapters of this bullish saga, staying attuned to market trends and capitalizing on periodic pullbacks can fortify investment strategies amidst evolving market conditions.