Current Market Observations

Geopolitical tensions combined with updates on labor markets fueled a volatile week of trading in both stocks and bonds. The Dow Jones Industrial Average fell -2.3% for the week, the S&P 500 Index fell –1.0%, and the NASDAQ fell -0.8%. Energy was the best-performing sector for the week (+2.8%), while Health Care was the worst-performing sector (-3.9%). First-quarter earnings season begins this week with the large-cap banks. JP Morgan, Wells Fargo, and Citigroup will report results this Friday. As the “higher for longer” feeling sunk into the fixed-income markets, traders reacted by selling bonds, and as a result, the 10-year Treasury rose 18 basis points to close the week at 4.39.

U.S. Economy 

Strong economic results raised overall concerns about the Federal Reserve rate cut timeline. The week ended positively with a robust jobs report indicating a healthy labor market, low unemployment, and steady wage growth, easing inflation worries. Despite concern over Fed actions, markets closed with optimism, interpreting the jobs report as a sign of continued economic and corporate growth. We continue to closely monitor the price of oil, which surged to a six-month high on Friday. A sustained upward trend in oil prices could reignite inflationary pressures, complicating Federal Reserve efforts to manage inflation. See the chart below from Trading Economics, which shows Crude Oil prices over the last year. 

Policy and Politics 

Over the weekend, news of the Israeli military’s withdrawal of ground troops from the Gaza Strip sparked optimism. This comes as Egypt offers to host a new round of talks aimed at reaching a ceasefire and hostage release deal. Both Israel and Hamas have agreed to participate. Over the last week, Russian drone attacks in Kharkiv intensified last week, causing casualties and damage. National polls indicate a continued tight race with President Biden and former President Trump neck-and-neck as Democrats claim a significant fundraising lead over Republicans.

Economic Numbers to Watch This Week 

  • U.S. Consumer Price Index for March 2024, prior 0.4% 
  • Minutes of Fed’s March FOMC meeting. 
  • U.S. Producer Price Index for March 2024, prior 0.6% 
  • U.S. Import Price Index for March 2024, prior 0.3% 

Last week, several Federal Reserve presidents provided updates, reinforcing the view that the economy continues to perform well. We look forward to updates from multiple large banking institutions later this week, which should provide valuable data points on the banking industry and economy. As more companies start releasing their earnings in the upcoming weeks, we will be listening for indications of improved sales and earnings growth across a wider spectrum of businesses beyond the dominant mega-cap tech stocks. Geopolitics will continue to be a risk that could derail the otherwise healthy macroeconomic outlook. Please reach out to your advisor at Valley National Financial Advisors with any questions. 

Current Market Observations

Markets were mixed on a holiday-shortened trading week, with the Dow Jones Industrial Average rising 0.8%, the S&P 500 Index increasing by 0.4%, and the NASDAQ falling -0.3%. Utilities were the best-performing sector for the week (+2.9%), while information technology was the worst-performing sector (-1.3%). Oil prices continued to move higher, finishing the week with a 3.2% gain. Friday saw the Fed’s preferred gauge for inflation, the Personal Consumption Expenditure Index, rise 0.3% (excluding food & energy), matching economists’ expectations. The 10-year Treasury saw continued buying last week, pushing yields down four bps for the week, finishing at 4.21%.

U.S. Economy 

Although last week was a quiet week for economic releases, on Friday, we saw the Federal Reserve’s preferred gauge of inflation, U.S. Core Monthly and Yearly PCE (Personal Consumption Expenditures) for February, and both measures were lower, signaling that inflation continues to fall, see Chart 1 below from Valley National Financial Advisors and Y Charts shows U.S. Core Monthly and Yearly PCE for five years. Federal Reserve Bank Chairman Jerome Powell has stated very clearly that they are watching the inflation data and will be data-dependent in terms of rate movements. The current Fed has been the most transparent we can remember regarding interest rate movements, which is why we do not expect any rate cuts until well into the second half of 2024, and even then, those movements in rates, if any, will be mild and data dependent.

This week, we will see numbers for new payrolls and unemployment insurance for March 2024, and companies will start to prepare for 1st Q EPS reports. Otherwise, we will have a quiet week regarding economic releases.  

Policy and Politics 

Last week saw a holiday-shortened week for Washington, with Good Friday on March 29th. Elevated geopolitical tensions persist amid the ongoing conflicts in the Middle East and the Russia-Ukraine war. U.S.-China trade tensions continue to be elevated with recent news of China’s oversupply of solar energy, electric vehicles, and lithium-ion batteries impacting U.S. producers. President Biden trails former President Trump by around two points in national polling and around three points in swing states. Prediction markets show roughly even odds of a Democratic or Republican win.

Economic Numbers to Watch This Week 

  • U.S. ISM manufacturing for March 2024, prior to 47.8 
  • U.S. Factory Orders for February 2024, prior –3.6% 
  • U.S. Job Openings for February 2024, prior to 8.9 million 
  • U.S. ADP Employment for March 2024, prior 140,000 
  • U.S. ISM Services for March 2024, prior 52.6 
  • U.S. Employment Report for March 2024 
    • Nonfarm payrolls, prior 275,000 
    • Unemployment rate prior 3.9% 

Updates from Federal Reserve Board Members continue highlighting lower inflation readings, improved outlook for GDP growth in coming quarters, and healthy job growth. Markets appear to be warming to the idea that stronger growth for longer is preferred over lower rates. We are encouraged by signs of housing supply improvement, which should help this year’s spring selling season. As earnings season kicks off in the coming weeks, we will be listening to any signs of economic softness communicated by corporate management teams. We continue to monitor geopolitical risks for signs of increased tension and spillover into new areas. Please reach out to your advisor at Valley National Financial Advisors with any questions. 

Current Market Observations

Last week, the Federal Reserve’s more dovish tone was well received by the markets. The Dow Jones Industrial Average rose 2.0%, the S&P 500 Index rose 2.3%, and the NASDAQ rose 2.9%. Communication services were the best-performing sector for the week (+3.9%), while healthcare was the worst-performing sector (+0.5%). The CBOE Volatility Index fell about 9% for the week, indicating greater confidence and calmness among investors (See Chart 1 below). The latter part of the week saw market participation broadening beyond mega-cap stocks, with small and mid-cap stocks performing well. With the Fed’s rate outlook intact, the 10-year treasury saw increased buying, pushing yields down 12 basis points for the week. 

U.S. Economy 

As mentioned above, the CBOE Volatility Index fell again last week. The index measures the implied expected volatility of the U.S. stock market. VIX (Volatility Index) is used as a barometer for fearful and uncertain markets. The VIX tends to increase when the market decreases and vice versa. During the financial crisis in 2008-2009, the VIX reached as high as 80.86. See Chart 1 below from Valley National Financial Advisors and Y Charts shows the VIX over 5 years.

The FOMC meeting went as expected, with Chairman Powell stating that the current path for rate cuts remains on track, and they plan on up to three rate cuts by year-end 2024. Just as important as the rate cut story, the FOMC announced an increase in their projections for economic growth in 2024 from 1.4% to 2.1%, thus cementing the so-called “soft-landing” scenario. Specifically, Chairman Powell noted, “The economy is strong, the labor market is strong, and inflation has come way down.” Lastly, Powell mentioned that it was appropriate for the Fed to slow the pace of its balance sheet reduction program, which has been another source of restrictive monetary policy. 

Thursday saw 118 new 52-week highs for the S&P 500, the newest highs in 3 years. The prior 13 times this number of 52-week highs was reached resulted in higher stocks one year out 13 out of 13 times, with the average return being 12%, see Chart 2 below from the Carson Institute. 

Policy and Politics 

Global turmoil escalated last week with an ISIS-linked terrorist attack in Moscow shortly after Vladimir Putin was reelected to another six-year term. Further, the Ukraine/Russia and Israel/Hamas wars are showing no signs of ending. In Washington DC, President Biden signed a $1.2 trillion spending package that was previously passed by the U.S. House and U.S. Senate, thus narrowly avoiding an embarrassing government shutdown. With this out of the way for Washington, DC, we will move heavily into the 2024 campaign season with both political parties (Democrats & Republicans) vying for wins in November.   

Economic Numbers to Watch This Week 

  • U.S. Durable Goods New Orders MoM for Feb 2024, prior –6.11% 
  • U.S. Initial Claims for Unemployment Insurance for the week of March 23, 2024, prior 210,000 
  • U.S. Real GDP (Gross Domestic Product) QoQ for Q$ 2023 (Revised), prior 3.20% 
  • U.S. Index of Consumer Sentiment for March 2024, prior to 76.50.
  • 30-year Mortgage Rate for the week of March 28, 2024, prior to 6.87% 
  • U.S. Core PCE (Personal Consumption Expenditures) Prince Index YoY for Feb 2024, prior 2.85% 

Last week, several encouraging signs for the economy and markets were observed. The Federal Reserve left rates unchanged at their Wednesday meeting while upgrading their GDP growth projections and highlighting the strength and resilience of labor markets. Despite a recent blip in inflation readings, the trend lower appears intact, and the Fed continues to see three rate cuts coming later this year. Lower rates will serve as a tailwind to the housing market, which reported improved existing home sales last week. Despite these encouraging signs, we remain focused on identifying emerging market risk areas. We will continue to look for investment opportunities where the risk vs reward tradeoff looks the most compelling. Please reach out to your advisor at Valley National Financial Advisors with any questions. 

Current Market Observations

Last week marked the second week of negative returns in the equity markets, albeit modestly negative, especially given the strong price rally we have seen thus far in 2024. Dow Jones Industrial Average fell –0.02%, The S&P 500 Index fell –0.13%, and the NASDAQ fell –0.70%. Equity markets sold off as two inflation reports (CPI (Consumer Price Index) and PPI (Producer Price Index)) showed numbers slightly higher than economists had predicted, leading investors to speculate that interest rates would remain higher for longer and that rate cuts were farther off than predicted as well. We at Valley National Financial Advisors have pointed to June 2024 as the earlier point at which the Fed would start to cut interest rates, and we are sticking with that projection. The 10-year U.S. Treasury bond yield rose 22 basis points last week to close at 4.31%.

U.S. Economy 

As mentioned above, two inflation reports showed that inflationary pressures are sticking around longer than economists thought. The U.S. CPI and U.S. PPI showed modest moves higher on a year-over-year basis, but the U.S. Core CPI continues to fall slowly but steadily. See Chart 1 below from Valley National Financial Advisors and Y Charts showing the inflationary trend in the above reports. While sticky inflation may seem like a problem, the path to the Fed’s 2% inflation target was never going to be linear; rather, it would be gradual and lumpy, and that is what we are seeing as higher interest rates continue to combat pandemic-related inflationary pressures. Fed Chairman Jay Powell and the FOMC will meet this week to determine interest rate policy for the next several months. We expect rates to remain unchanged, with the Fed Funds Rate at 5.50%. After the meeting, Chairman Powell’s press conference will give us some needed direction and timing on the future path of rates and potential cuts.

Policy and Politics 

Shockingly, Vladimir Putin was re-elected to a third term as President of Russia. In a media-staged election, Mr. Putin secured 78% of the vote and will be Russia’s leader until at least 2030. Sadly, we do not expect an end to the Ukraine/Russia War as Putin will regard this “victory” as proof that his war efforts are the correct path for Russia to be taking. Global turmoil and conflict continue in Israel and Haiti, with neither region showing a cessation in troubles. Lastly, the U.S. Senate will take up a bill that the U.S. House passed last week where the massively popular app TikTok must be sold off by Chinese company Byte Dance or risk being banned in the U.S. Lobbyists for TikTok and competitor Meta are pouring money into Washington as each tries to pressure Congress for action in either direction. 

What to Watch This Week 

  • Target Fed Funds (Upper Limit) released 3/20 current 5.50% 
  • U.S. Initial Claims for Unemployment Insurance week of March 16, released 3/21, prior 209,000. 
  • U.S. Existing Home Sales Monthly for Feb ’24, released 3/21, prior 4.00M 
  • 30-year Mortgage Rate for the week of March 21, released 3/21, prior 6.74% 

Our weekly objective in writing The Weekly Commentary is to inform and educate our readers about the markets, economy, and risks. Of the three, risk is most important to us as it is the hardest to quantify and use when adjusting investment portfolios. Lately, we have struggled to find serious market risks or continued economic growth. Important sectors of the economy are running nicely: consumer, banks, corporate EPS, and housing; all the while, labor remains healthy, with a national employment rate of 3.9%. We expect the Fed to remain on hold as inflation remains stubbornly sticky and is not yet at 2.00%. Watch the Fed and listen to Chair Powell’s message. Please contact your advisor at Valley National Financial Advisors with any questions. 

Current Market Observations

Equity markets were down last week, with all three major indexes reporting negative results. The S&P 500 Index fell –0.26%, the NASDAQ -1.17%, and the Dow Jones Industrial Average –0.93%. Fixed income markets saw lower yields last week as Fed Chair Powell gave an indication that rate cuts are “not far” off. Also impacting rates was the February jobs number, which showed lower wage pressure and revisions lower than the hot January jobs numbers. A big test for bond markets will come later this week when the CPI (Consumer Price Index) and PPI (Producer Price Index) numbers are reported for January. The 10-year U.S. Treasury bond yield fell 9.4 basis points last week to close at 4.09%.

U.S. Economy 

The February jobs report from Friday indicates job growth remains healthy, with nonfarm payrolls increasing 275,000 jobs, above consensus expectations for a rise of 198,000. This follows a downwardly revised 229,000 increase in January. Despite encouraging headline figures, prior estimates of job expansion in December and January were revised down to 167,000 jobs. The unemployment rate rose to a two-year high of 3.9%, and wage momentum cooled, indicating less inflationary pressure.

Policy and Politics 

During testimony last week, Fed Chair Powell indicated a softening of banking rules, specifically stating that proposed new rules to force lenders to strengthen their balance sheets (Basel III) would be scaled back or reworked. This comes in response to complaints from industry leaders about the overall cost and economic impact of enacting the original proposed changes. 

What to Watch This Week 

  • U.S. Consumer Price Index released 3/12/24, prior +0.3% 
  • U.S. Retail Sales released 3/14/24, prior –0.8% 
  • U.S. Producer Price Index released 3/14/24, prior +0.3% 
  • U.S. Consumer Sentiment (prelim) released 3/14/24, prior 76.9% 

In the current market landscape, the stock market and the broader economy demonstrate robust performance buoyed by several factors. Healthy corporate earnings bolstered by resilient consumer spending, economic productivity gains, and increased business technology spending are driving equities to continued new highs. Additionally, recent data pointing to a soft landing for the economy continues to provide a supportive backdrop, instilling confidence among investors. With a healthy labor market combined with the prospects for lower rates later this year, the overall economic and market outlook remains optimistic. It should provide help to the housing market. However, prudent risk management and close monitoring of potential inflationary pressures, geopolitical tensions, and trade disputes remain essential. Overall, the positive momentum in both the stock market and the economy reflects a favorable environment for investors.

In navigating volatile markets, it is important to maintain a long-term perspective grounded in the fundamentals of the economy and industry-leading companies. While short-term fluctuations and unforeseen challenges may arise, staying committed to well-thought-out investment strategies is key. As we move forward, let us remain optimistic about the future and recognize that overly emotional markets often pave the way for opportunities and growth.

Current Market Observations

By: Chief Investment Officer, William Henderson

Equity markets were mixed last week, with two of the three major indexes reporting positive results and only the Dow Jones Industrial Average falling for the week. The S&P 500 Index rose +0.95%, the NASDAQ rose +1.74%, while the Dow Jones Industrial Average fell –0.11%. Critically important to a needed broadening in equity returns, the Russell 2000 Index of Small Capitalization stocks rose +3.00%. We do not typically report on the Russell 2000, but this week’s move higher has put some breadth into the market rather than keeping returns concentrated in the “Magnificent 7.” Concentrated markets tend to rise and fall quickly and are usually based on a small piece of information rather than sound fundamentals. Fixed-income markets were quiet last week as traders and markets have accepted that interest rate cuts by the Federal Reserve are further off than previously thought. The 10-year U.S. Treasury bond yield fell seven basis points to close the week at 4.19%.

U.S. Economy 

Last week’s inflation data showed that prices on consumer goods continue to fall. See Chart 1 from Valley National Financial Advisors and Y Charts showing U.S. Core PCE (Personal Consumption Expenditures) and US PCE YoY. The recent U.S. Core reading is at 2.85%, compared with 2.94% last month and 4.90% last year. This recent reading is lower than the long-term average of 3.24%. While the U.S. Inflation Rate is currently at 3.09%, below the Fed’s target of 2.00%, Fed Chairman Jay Powell has stated that interest rates could move before the inflation rate reaches their target. A Fed pivot (moving from raising rates to cutting rates) will help broaden out equity returns beyond the “Magnificent 7” because small-cap and mid-cap U.S. companies tend to be more interest rate sensitive than large-cap companies.

Corporate profits continue to be strong, and forward-looking estimates suggest we will see profit growth over the next year. Thus far, 90% of S&P 500 Index companies have reported 4th quarter earnings, and according to Bloomberg, revenue growth was +3.8%, while earnings growth was a healthy +7.5%. While much of the growth was attributable to the “Magnificent 7,” if the Fed does eventually pivot on interest rates (we expect not until the second half of 2024), cyclical sectors of the economy will benefit. Thus, economic growth will continue at a robust pace.

Policy and Politics 

March 5th is Super Tuesday, with 15 U.S. states holding primaries on the same day. We expect that the 2024 U.S. presidential primary race will be determined after this date, and whether we have Trump v Biden or Haley v Biden, the next 8+ months will be chock full of the nonsense that sadly surrounds major U.S. elections these days. In the meantime, lawmakers have reached a tentative agreement (to be voted on this week) to fund the government, thereby avoiding another embarrassing shutdown.

We continue to watch the saga playing out with New York Community Bank, where last week they restated their previous earnings results and disclosed potential “weaknesses in internal accounting practices” (emphasis ours!). Banks can be fragile places because confidence in management means confidence in where one places their money for safekeeping. We are confident that the Federal Reserve Bank, the FDIC, and the Treasury know NYCB’s problems and will provide needed guidance and assistance.   

What to Watch This Week 

  • U.S. Job Openings: Total Nonfarm, released 3/6/24, prior 9.026M 
  • U.S. Initial Claims for Unemployment Ins. for the week of 3/2/24, released 3/7/24, prior 215.000. 
  • U.S. Labor Force Participation Rate for Feb 2024, released 3/8/24, prior 62.5% 
  • U.S. Unemployment Rate for Feb 2024, released 3/8/24, prior 3.7%  

Market volatility remains sanguine, and other than the potential for a government shutdown, news from Washington DC has been muted. Global turmoil exists with Israel/Hamas and Ukraine/Russia, but true market volatility is muted. See Chart 2 below from Valley National Financial Advisors and Y Charts showing the VIX or Volatility Index. The VIX is at 13.40, well below the long-term average of 19.11. Our view on this data point is that true risks to the market, like higher interest rates and a major U.S. economic slowdown or disruption, remain on the sidelines, allowing markets to trade on their own merits. 

Among the noise and news, markets continue to set new all-time highs as they efficiently filter out the noise. Low volatility, remaining fiscal stimulus from previous years’ bills (CHIPs Act or Inflation Reduction Act), and growing corporate earnings create real tailwinds for equities. If we get a Fed pivot on interest rates in the second half of 2024, further tailwinds will emerge. It is hard to find unwelcome news these days, but we will keep looking! Reach out to your advisor at Valley National Financial Advisors for help or questions.

Current Market Observations

By: Chief Investment Officer, William Henderson

The shortened President’s Day Holiday week, with few economic news releases, allowed for one story to dominate the news and, therefore, market returns for the week. That story was AI (Artificial Intelligence) chip maker Nvidia’s (NVDA) 4th quarter EPS release, which showed the “Magnificent 7” member besting Wall Street analysts’ expectations for revenues and earnings. NVDA stock increased by +8.5%, adding $277 billion in market cap and notching a one-day Wall Street record. All major market indexes followed suit and ended the week higher: Dow Jones Industrial Average +0.9%, the S&P 500 Index +1.2%, and the NASDAQ +0.6%. An area of weakness in the stock market continues to be small capitalization stocks, which continue to lag the overall market. Fixed-income markets continue to push off any thoughts of rate cuts by the Federal Reserve before the second half of 2024. The 10-year U.S. Treasury bond yield fell four basis points to close the week at 4.26%.

U.S. Economy 

It was a quiet week for economic releases. This week, we get the revised 4th quarter US GDP (Gross Domestic Product), which will be closely watched for upward revisions from the current +3.3%. Further, the February 2024 Index for Consumer Sentiment will be released, and the question will be whether consumer confidence moves higher yet again. Minutes from the January 2024 FOMC (Federal Open Market Committee) meeting confirmed what we have been saying for quite some time, that interest rate policy will remain data-dependent. Policymakers further stated that they continue to see risks of continued price stability.

Policy and Politics 

Of course, 2024 is a US presidential election year, and Saturday showed former President Trump beating former South Carolina Governor Nikki Haley in the South Carolina GOP primary. While the race for the GOP candidate is not over, it is getting narrowed down, but we will know who the GOP candidate is on Super Tuesday (March 5). 

Globally, politics and policy remain troubled as there is no end in sight for either Ukraine/Russia or Israel/Hamas.

What to Watch This Week 

  • U.S. Real GDP (Quarter over Quarter) for Q4 2023, released 2/28/24, prior 3.30% 
  • U.S. Core PCE (Personal Consumption Expenditures) Price Index for January ‘24, released 2/29/24, prior 2.93% 
  • U.S. Initial Claims for Unemployment Insurance for week of Feb 24, 2024, released 2/29/24, prior 201,000. 
  • U.S. Index of Consumer Sentiment for Feb 2024, released 3/1/24, prior 79.60. 

Anytime a single stock’s action moves the markets, such as Nvidia did last week, we realize how thin the markets are and how starved for news and events Wall Street traders are. Certainly, the NVDA news was big, and adding a $277 billion market cap was a new record, but shouldn’t the real story be the economy? The U.S. economy continues to confound all the experts as it grows and adds employees each week. After 90% of S&P 500 companies have reported 4th quarter earnings, we see a healthy 7.5% earnings growth. We will be intrigued this week as new 4th Q GDP data and the important measure of consumer confidence will be released. Market focus will soon move to the March FOMC meeting and whether there will be any change in monetary policy. Reach out to your advisor at Valley National Financial Advisors for help or questions.

Current Market Observations

By: Chief Investment Officer, William Henderson

Equity markets sold off, with all three major indexes posting negative returns for the week. (Dow Jones Industrial Average –0.11%, S&P 500 Index –0.42%, NASDAQ –1.34%). Meanwhile, the Russell 2000 Index of small-capitalization stocks rallied +1.17% for the week, breaking from the herd to produce a positive return. Equity markets were pushed into negative territory after releasing January’s CPI (Consumer Price Index) data, which moved higher. The modest move higher in monthly CPI data (+0.31%) reinforces our notion here on The Weekly Commentary that the Fed is data dependent and rate cuts are further off in the future because inflation is not yet tamed in Fed Chairman Jay Powell’s mind. Following the same path, fixed-income markets performed poorly last week, with the 10-year U.S. Treasury bond yield increasing by 13 basis points to 4.30%.

U.S. Economy 

As mentioned above, the CPI report for the month of January showed a move higher, but the long-term story remains the same: inflation is coming down. Chart 1 below from Valley National Financial Advisors and Y Charts shows monthly and annual CPI over the past four years. The annual rate of CPI is down from the 9% level we saw in 2022, and the current rate (3.09%) is below the recent average of 4.00%. Monthly figures are more volatile than annual figures, and it is not unusual to see a move higher in monthly CPI in January as that is the month many companies push through higher prices on goods and services. We believe the Fed will not cut interest rates until the second half of 2024, and any moves in interest rates will be predicated by precise data indicating inflation is at or near the Fed’s 2.00% target rate. Equity and fixed-income markets were too quick to price in earlier rate cuts, and markets are simply repricing to reflect that rates are not coming down anytime soon.

Last week, the University of Michigan released January’s U.S. Index of Consumer Sentiment. Chart 2 below from Valley National Financial Advisors and Y Charts shows the index over the past three years. Since bottoming in July of 2022, the index has moved higher, and more specifically, the last three readings showed improvements in Consumer Sentiment. The index historically indicates increased consumer confidence in economic expansionary periods. Markets understand this, and while we saw a pullback in stocks last week, the trend remains in place – the economy is growing, consumers are spending, and companies are making money.

Policy and Politics 

We are in a holiday-shortened week for Washington, with President’s Day on February 19. There are a few important economic reports this week for the same reason. Washington is content on arguing about a funding bill for Ukraine and Israel with or without money for U.S. border controls. It is certainly redundant but necessary to mention that we are in a presidential election year for the U.S. Eventually, that will take center stage in all that happens in Washington, DC.

What to Watch This Week 

  • U.S. Initial Claims for Unemployment Insurance for the week of Feb 17, released 2/22, prior 218,500.  
  • U.S. Existing Home Sales for Jan 2024, released 2/17, prior 3.78M. 
  • U.S. 30-year Fixed Mortgage Rate for the week of Feb 22, released 2/17, prior 6.77% 

Summary 

Equity markets were early to price in March ‘24 rate cuts, and as the data has unfolded, it is evident that the Fed is not inclined to lower interest rates until the 2.00% inflation target is hit. We are now seeing a repricing in markets to accurately reflect rates cuts much later in 2024 than March. We have said this for a while and stick to our notion of not fighting the Fed. Pushing aside any notion of interest rate cuts, we are still sitting with a growing U.S. economy, especially when compared to other developed nations, which eventually will be good news for equity markets. It is difficult to remain confident about markets when conflicting data exists, but long-term trends remain in place, and our outlook remains cautiously optimistic for 2024. Enjoy the quiet week, and reach out to your advisor at Valley National Financial Advisors for help or questions.

Current Market Observations

Equity markets ended last week by setting new all-time high records for the Dow Jones Industrial Average (+0.41%) and the S&P 500 Index (+1.25%), while the NASDAQ notched another winning week as well (+2.28%). Last week, the modest but record-setting move placed all three indexes in the green on a year-to-date basis (see numbers immediately below). The early slowness we saw in equity markets thus far in January resulted from investors and markets accurately resetting the timing and pace of the coming Fed rate cuts. At the end of 2024, futures markets were pricing in Fed rate cuts (often deemed positive actions for equity markets) as soon as March 2024. We have said previously, and stick to the conviction, that March was too soon and the likely path to lower Fed Funds Rates would be closer to June 2024. Futures markets have moved from a 100% chance of a cut in March to a 50% chance, which we believe is more accurate as inflation still has a bit more cooling to do before it settles around 2.00%. Interest rates increased last week, with the 10-year U.S. Treasury rising 19 basis points to 4.15%. Some strong economic data was released last week, including 4th quarter retail sales and consumer sentiment, which we will detail below.

U.S. Economy 

As mentioned above, U.S. Retail & Food Service Sales jumped +0.55% for December 2023, up from +0.35% for November 2023 and above the long-term average of +0.40%. This was confirmation that the year-end holiday shopping season was strong and, importantly, shows that consumers are not yet too tired to continue fueling the growing U.S. Economy. On the heels of that news, the U.S. Index of Consumer Sentiment, as the University of Michigan reported, jumped to 78.8, well off the recent low of 50.0 set in 2023. See Chart 1 below from Valley National Financial Advisors and Y Charts. It is important to note that a rising consumer sentiment index shows increased consumer confidence, which is generally evident in economic expansionary periods. While not the only predictor of future economic growth, this measure tells us what the consumer thinks about the future. This week, we will see real economic data when the 4th quarter of 2023 GDP is released. Additionally, we continue to monitor corporate earnings releases, which thus far have beaten, frequently softer, Wall Street analysts’ expectations.

Policy and Politics 

In positive news, the U.S. has avoided an embarrassing government shutdown as the dueling parties finally reached a budget deal. This week is the New Hampshire primary, where we get further indications of the presidential candidates for U.S. President in November 2024. While it is a foregone conclusion that President Biden will be the Democratic candidate, with Florida Governor Ron DeSantis dropping out, we are down to Nikki Haley and former President Donald Trump on the Republican ticket. All we have to say in this regard is that drama will follow. Markets are efficient, but politics are not. Stay tuned because as we move into the South Carolina primary and Super Tuesday in March, the final presidential battle will be formed.

What to Watch This Week 

• U.S. Durable Goods Monthly Orders for Dec 2023, released 1/25, prior 5.39%
• 30-year US Mortgage rate for week of Jan 25, released 1/25, prior rate 6.60%
• U.S. Initial Claims for Unemployment Insurance for week of Jan 20 released 1/25, prior 203,250.
• U.S. Core PCE Price Index for Dec 2023, release 1/26, prior 3.16%
• U.S. Real GDP for 4th Quarter 2023, released 1/26, prior 4.90%

It is not news to The Weekly Commentary readers that the U.S. economy is ~70% consumption-based, meaning U.S. Consumers drive the largest part of the U.S. economic growth. Consumer sentiment is rising, and U.S. unemployment remains at historic low levels (3.6%). This is a simple equation – Americans are working, feel good about the economy, and will continue to spend. However, globally, turmoil and unrest abound. China continues to founder and is struggling to reach government-invented GDP targets. A brief look at headlines from the Middle East drums up issues that have lasted 75+ years with no end in sight for the Israel/Hamas War. The conflict has bubbled over into Iran, Yemen, and Lebanon and has impacted Red Sea commerce. The Russia/Ukraine War will soon move into its 3rd year, with no end in sight. While it is easy to see the U.S. as an island and immune to the World’s problems, our involvement with every conflict is usually inevitable. We expect markets to underprice the global turmoil and focus instead on eventual Fed rate cuts in 2024 as inflation moves closer to the Fed’s target of 2.00%. Corporate earnings growth in 2024 remains important, and we expect technology to remain the driver of growth and expansion this year. Expect volatility all year – but every year brings volatility, as we all know by now. Please reach out to your advisor at Valley National Financial Advisors for assistance.

Current Market Observations

We all know that streaks are meant to be broken, and last week, we broke the nine-weeklong streak of positive weekly gains in the stock market. It was to be expected as early in the year, many movements take place that bring stocks down, such as the beginning of the year’s positioning after year-end tax-loss harvesting. Either way, all three major indexes started off 2024 in the negative, with the Dow Jones Industrial Average falling –0.65%, the S&P 500 Index falling –1.80%, and the NASDAQ falling –3.78%. Looking at the Top Gainers vs. Top Losers in 2024, it seems like the opposite of 2023, which is comical. Apple, the big winner in 2023, is now the biggest loser! Oh, what a few days make in the efficient stock market. Articles and pundits everywhere are already talking about the end of Apple. We will keep watching the data. In the fixed-income markets, bonds also sold off last week, with the 10-year U.S. Treasury increasing by +0.17% to end the week at 4.05%. The yield curve (the slope of the line between 2-year yields and 10-year yields) remains inverted as it has been for over a year – with nary a recession in sight. 

U.S. Economy 

Last week saw an unexpected pop in the labor market, with Nonfarm payrolls increasing by 216,000 (higher than economist expectations) and the unemployment rate holding steady at 3.7%. This pair of data points set the stage for 2024, where labor continues to fuel economic expansion. Moreover, the Fed’s long sought-after “Goldilocks Soft-Landing” looks like a real possibility. The dramatic rise in interest rates over the past two years to slow inflation has not slowed the economy so much that we rolled into a recession. While this is good news for the economy, we must state that rate hikes take a long time to impact the economy, and we could still see some impacted slowdown ahead as we move forward. When cost-cutting is needed due to a slowdown in a service-based economy, the first thing to cut is jobs.

Policy and Politics 

Washington gets back to work this week (we say that with all the best intentions and not sarcasm), and the first item on the agenda will be funding the government before a partial shutdown on January 19, 2024. Each side will try to tie funding the government to border security and aid for Israel and Ukraine. With the billions of dollars flowing out of the U.S. for wars, it is hard not to feel the pressure on our own budget. Holding funds for our government to operate hostage because of funds desired for foreign operations seems anathema, but we are investors, not politicians. Of course, next week is the Iowa Caucus (January 15), and the week after that (January 23) is the New Hampshire Primary. We will then be moving into the full presidential election cycle. 

What to Watch This Week 

  • U.S. Inflation Rate for Dec 2023, released 1/11, prior rate 3.14% 
  • U.S. Consumer Prince Index Ex Food & Energy for Dec 2023, released 1/11, prior 4.01% 
  • U.S. Initial Claims for Unemployment for week of Jan 6, 2024, released 1/11, prior 202,000. 
  • 30-year Mortgage Rate for week of Jan 11, 2024, released 1/11, prior 6.62% 
  • U.S. Producer Price Index Ex Food & Energy for Dec 2023, released 1/12, prior 1.97% 

One week does not make a year or a market. Last week’s returns were attributed to positioning and the prior year’s tax loss harvesting. It is comical to see the economic press turn on Apple as fast as they did – from darling to dud in 5 days. From personal experience, the results received from Apple products like the iPhone, iTunes, and Apple TV+ are still positive in a meaningful way. As Fed Chairman Jay Powell continues to navigate the rate path in 2024, it is evident that we are not in the “pivot” stage where the next move from the Fed in rates is down. Of course, the timing of rate cuts is the real question. Markets are pricing in a March 2024 rate cut, and we think that may be a little too soon, given the economy’s continued strength, especially in the labor market. We will watch the data, pay attention to corporate earnings reports, and follow the news regarding world events and major elections. Reach out to your advisors at Valley National Financial Advisors for questions or help.