Financial markets once again logged a positive month, with the S&P 500 gaining 5.1%, the DJIA increasing 2.5% and the NASDAQ jumping 6.2%. S&P 500 equal weight (RSP) gained 4.8%, Small Caps (IWM) surged 5.5%. The rest of the developed world (CWI) popped 4.6% and bonds (AGG) shed .1%
TWG Growth, moderate and conservative models gained 4.55%, 3.8% and 3% respectively, exceeding their respective benchmarks returns of 4.22%, 3.3% and 2.4%
What Moved the Markets
Early February jobs data pointed to more hires than expected, implying the labor market remains strong.
On February 9th, December’s revised inflation reading came in lower than initially reported. This bodes well for the ongoing battle against inflation, as lower inflation would enable the Fed to take a more accommodative stance in setting future interest rate policy. Markets welcomed the downward revision and ripped higher.
During the week of Feb 13th, the January consumer price index (CPI) inflation readings came in at 3.1% annualized, pointing to a hotter than expected rate and suggesting a stickiness that could challenge the narrative that the Fed has room to cut rates. Expectations were for a 2.9% reading, and the market sold off on the news. At the end of the week, producer price index (PPI) also came in slightly higher than expected, bolstering the reality that the path to 2% will be lumpy. Retail sales for January were also on the weaker side, signaling a slowing of consumer spending.
While one month does not make a trend, these readings likely push out the Fed rate cuts farther into the year. We believe the market was getting ahead of itself coming into the new year with overly optimistic rate cut expectations. The Fed will likely be patient (as they have stated), and the market may need to adjust to the recent reality that cuts are not imminent.
Portfolio Adjustments
The big theme for the month was a broadening of stocks that participated in the month’s advance, as industrials, consumer discretionary, materials and info tech were sectors that outperformed the S&P 500. Utilities once again lagged the broad market. Three hundred and fifty one stocks advanced and 151 declined, a notable improvement from January’s narrower market participation.
Except for Meta, Amazon and Nvidia, Mega Cap tech stocks were underperformers for the month. Apple and Google shed around 5%. Tesla dropped out of the top 10. But Nvidia rallied 18% and represented 20% of the S&P 500’s gains for the month. Amazon’s 14% gain for the month on the heels of reporting solid earnings and its inclusion in the DJIA helped the consumer discretionary sector outperform, as AMZN is some 25% of that sector by market capitalization.
We welcome an environment where the market advances are not reliant on the generals to carry the entire market. With such broadening, the trades effected for the month reflected a 30% reduction in large growth, a 40% increase in large value, as QQQs and S&P 500 were trimmed and the proceeds were used to increase exposure to large cap value, mid cap growth, and international stocks. Japan traded to a new all-time high, recovering from its prior peak in 1989!
Most stocks in the materials and industrials sectors lean more in the value camp, which exposure in our model portfolios increased during the month.
We are pleased to observe how our process gradually rotated out of large cap growth to create a more diversified allocation.
Looking Ahead
In our opinion we are probably entering a period of calm. With earnings season in the rearview mirror, and the Fed widely expected to NOT cut rates during the march meeting, the market will likely trend in a narrow range. We don’t anticipate the rug being pulled out from us – the economy is still showing strength, jobs are plentiful, and inflation, while rising slightly over the past two months, is still much lower than it was a year ago.
Even in the face of less-than-ideal inflation data, the market is holding its own. Valuations are stretched, but not overextended across the board. After a 23% run up from the October 2023 lows, the S&P 500 should probably take a breather.
The next likely market moving event will probably be the upcoming earnings season, starting in mid-April, as well as the June Fed policy meeting, which the market is pricing in a meaningful probability of the first rate cut. Should data come in less favorable leading up to June, then the Fed may either hold or start to cut, which decision will likely impact the market movement leading up to the Presidential election.
We wish you a happy Easter and Passover as we eagerly anticipate the early signs of spring and the seasonal warm up to follow.
