Thursday, 3/28/2024 p.m.
- Stocks edge higher to close out a strong quarter: Equities closed slightly higher, sending the S&P 500 to a fresh record high and its best first-quarter gain in five years. There were no major headlines spurring the day's action, with markets continuing to focus on the broader health of the labor market and trends in inflation. To that end, it was not surprising to see markets tread some water Thursday in anticipation of the important PCE inflation report due out on Friday. Looking across markets, global equities were generally higher, as were gold and oil prices. Interest rates ticked up slightly, with the 10-year Treasury yield at 4.2%, a level around which yields have been hovering lately, as markets have, in our view, come to grips with the likelihood that the Fed probably won't begin cutting rates until the summer at the earliest.*
- Labor market remains in good shape: This week's report on initial jobless claims showed that new claims fell to 210,000, the second-lowest reading since early January.* Continuing claims rose modestly, having trended higher over the last year but still consistent with a healthy jobs market. The low initial claims tell us that there is not yet a wave of layoffs that threatens to push the unemployment rate meaningfully higher in the near term. At the same time, the gradual move higher in continuing claims signals to us that it's getting slightly more challenging for those workers on the sidelines to find new jobs. The labor market remains tight, with low unemployment and ongoing monthly job growth, but we expect some softness to emerge as we progress through the year. We doubt the employment picture will deteriorate to the point where consumer-spending growth dries up, but recent announcements from notable retailers indicate that some softness is emerging within discretionary purchases. This is consistent with our view that GDP growth will slow this year but should remain in positive territory, as manufacturing and business investment perk up alongside some resilience in household consumption.
- Markets looking to new inflation data: While the consumer price index (CPI) gets most of the headlines, the Fed's preferred measure of inflation is the personal consumption expenditures (PCE) reading, which is due out on Friday. CPI readings have come in hotter than expected in the last two months, so markets will be particularly interested in the PCE trend, which could set the tone for upcoming Fed decisions. Consensus expectations are for core PCE (excluding food and energy) to fall versus the pace in the prior month. The Fed has been willing to ascribe some of the hotter inflation data in January to seasonal impacts, so it will be important to get confirmation that consumer price increases are resuming their path of moderation as we progress. Inflation and employment conditions are, in our view, the two most important influences on upcoming Fed rate decisions, so between tomorrow's PCE reading and next week's monthly payrolls report, markets will have a lot to digest next week. Broadly, we think both will trend in a reasonably favorable manner this year, but any disappointments from the monthly reports could serve as a catalyst for volatility, something the markets have experienced very little of so far this year.
Craig Fehr, CFA
Investment Strategy
*FactSet
- Stocks finish higher: Equity markets closed higher Wednesday, with the S&P 500 up roughly 0.9%. Leadership favored value-style stocks, with the Russell 1000 Value Index gaining over 1% today, while the Russell 1000 Growth Index rose by about 0.2%.* Small-cap and mid-cap stocks showed strong performance today as well, with the Russell 2000 gaining over 1.5% and the Russell mid-cap index rising over 1%.* Treasury yields drifted lower, with the 2-year yield finishing around 4.57% and the 10-year yield ticking down to 4.19%.* Overseas, European markets closed mostly higher while Asian markets finished mixed overnight, with Japan's Nikkei Index logging a 0.9% gain and Chinese markets mostly lower.* Looking ahead, markets will have an opportunity to digest the latest inflation data with the release of U.S. personal consumption expenditures (PCE) inflation on Friday.
- Equity markets have been unphased by higher yields: Markets and Fed policy moved in tandem for much of 2023. From August to October of last year, stocks pulled back as concerns mounted that the Fed might have to keep interest rates higher for longer to lower inflation to its 2% target. During this time, the 10-year Treasury yield surged from around 4% in early August to nearly 5% by late October.* However, in the final two months of 2023, bond yields moved sharply lower while equity markets rallied. The 10-year Treasury yield declined about 1%, finishing the year around 3.9%, while the S&P 500 gained over 12%.* The move lower in bond yields to close out 2023 was driven by lower inflation readings and commentary from the Fed that signaled it was likely done raising rates. Turning to 2024, bond yields have risen to begin the year; however, unlike the indigestion we saw in markets in the middle of 2023, stocks have continued to move higher. In our view, equity-market resilience in the face of higher rates has been a product of robust economic growth and strong corporate profits. Additionally, at last week's FOMC meeting, Fed projections showed it still sees a case for three 0.25% interest-rate cuts in 2024, despite higher-than-expected inflation readings in recent months. We believe the economic backdrop should remain supportive for equity markets, particularly as inflation trends lower and the Fed potentially pivots to interest-rate cuts around midyear.
- Markets eye June for first rate cut: Last week the Fed left policy rates on hold, as expected, at 5.25 – 5.5%. In addition to the policy-rate decision, updated Fed projections showed that Fed members still see scope for three 0.25% interest rate cuts in 2024, unchanged from their December projections despite higher-than-expected inflation readings in January and February. Futures markets are now pricing in roughly three 0.25% interest-rate cuts in 2024, with about a 70% chance the first cut is delivered at the June meeting.** Market expectations for three rate cuts in 2024 aligns with our view coming into this year that the Fed would likely cut rates three to four times, with the first cut delivered around midyear. Later this week we'll see an important read on the Fed's preferred measure of inflation, core personal consumption expenditures (PCE), which will be released on Friday. With the Fed currently data-dependent, incoming inflation and economic data over the coming months will play a critical role in future monetary-policy decisions. Expectations are for core PCE to rise by 2.8% year-over-year, unchanged from the January reading. We believe that inflation should continue to moderate over the coming months, and that the Fed will likely have a credible case to begin cutting rates at the June meeting.
Brock Weimer, CFA
Associate Analyst
*FactSet
**Bloomberg.
- Stocks finish modestly lower: Equity markets closed lower on Tuesday, with the S&P 500 logging a roughly 0.3% decline for the day. Health care was the top-performing sector, gaining roughly 0.3%, while utilities lagged, shedding over 1%.* Overseas, European markets finished mostly higher following a better-than-expected consumer confidence reading in Germany. On the U.S. economic front, new orders for manufactured durable goods were up 1.4% month-over-month in February following two consecutive monthly declines. Additionally, the consumer confidence index reading for March was slightly below market expectations, driven by less optimism around future business conditions, labor-market conditions, and income expectations.* Treasury yields ticked modestly lower today, with the 2-year yield finishing around 4.59% and the 10-year yield at 4.23%.*
- Equity leadership has broadened over the past month: Equity markets have picked up where they left off in 2023, with the S&P 500 rising to all-time highs and which is currently higher by about 10% year-to-date.* After leading markets higher to the tune of an over 50% gain in 2023, the information technology and communication services sectors are once again the top-performing sectors in 2024, each higher by over 13%.* From a style standpoint, growth is once again outperforming value to start the year. The Russell 1000 Growth Index has gained roughly 12% year-to-date compared with roughly 7% for the Russell 1000 Value Index. However, the past month has seen a broadening of leadership, with energy, utilities and materials the top-performing sectors. Over the same time period, value-style stocks have gained 3.8% compared with growth-style stocks' 2.4% gain.* Looking ahead, we believe performance could be more balanced amongst growth- and value-style stocks, with some of 2023's laggards potentially playing catch-up over the course of 2024. Potential catalysts for broader participation in equity markets could include lower inflation, a Fed that pivots to interest rate cuts around midyear, and improving earnings trends in value-style stocks.
- Markets await Friday's inflation report: Inflation data is set to take the spotlight later this week, with the release of personal consumption expenditures (PCE) inflation due out Friday, though markets will be closed for Good Friday. Markets will watch with a keen eye toward the Fed's preferred measure of inflation, core PCE, which is expected to have risen by 2.8% year-over-year in February, unchanged from the January reading.* On a month-over-month basis, core PCE is expected to rise by 0.3%, down from the January reading of 0.4%.* Our view is that over the course of the year, inflation will continue to trend lower toward 2.5%, perhaps supported by moderating shelter costs and decelerating wage growth. Housing cost has been a stubborn piece of the inflation basket, with the housing component of PCE rising by 6.1% year-over-year in January. More timely indicators of real-time rental cost have moved lower over the past year, which could support lower shelter inflation readings in the month ahead. However, as we've seen in the past couple of months, the path lower could have bumps along the way.
Brock Weimer, CFA
Associate Analyst
*FactSet
- Equities give a little back after a big week – Stocks closed modestly lower on Monday, following the best weekly gain of the year that was prompted by dovish commentary from the Fed's latest policy meeting. Despite Monday's pause, equities continue to enjoy positive momentum, with U.S., Canadian, German and Japanese indexes all making new highs in recent days. In the bond market, rates ticked higher after falling last week. The 10-year Treasury yield rose above 4.2% on Monday, having been as high as 4.35% before last week's Fed meeting that eased concerns of an extended restrictive monetary-policy stance. Small-caps outperformed on the day, reflecting some optimism around the economic outlook. Meanwhile, energy was the standout sector leader, helped by a jump in oil prices. *
- Government funding deal reached – Congress passed a $1.2 trillion package over the weekend to fund the government and avert a shutdown. Partisan divisions over items such as immigration policy, defense budgets, foreign aid and overall spending cuts have hampered negotiations, but the passage of the bill takes an imminent government shutdown off of the table for now. This deal will fund the government through September, meaning another budget showdown is likely ahead of the presidential election. More broadly, we think government deficits and debt loads will be a focal point, not only during the election, but for financial markets, given elevated interest rates have pushed U.S. federal government interest payments above $1 trillion for the first time, roughly double from just three years ago. We don't think U.S. government debt threatens the economy or markets in the very near term, with the vibrancy and prospects of economic growth going a long way to stave off a debt crisis. That said, we do expect that much further down the road challenging adjustments to tax policy and mandatory spending programs will likely be required to address elevated debt risks.
- Fairly quiet week ahead – It's a holiday-shortened week, with markets closed on Good Friday. With the Fed meeting and latest CPI report in the books, the next employment report due out on April 5, and no major corporate earnings announcements on the docket, investors will take this opportunity to digest the overall backdrop of investment conditions within the context of the sharp rally that has taken shape this year. With the first quarter drawing to a close this week, the S&P 500 is sitting at a nearly 10% year-to-date gain, led by double-digit gains for the communication services, technology, energy, industrial and financial services sectors, with the latter three finding footing of late, reflecting some broadening of leadership, as cyclical areas of the market have gained ground. We expect markets to continue to take cues from the Fed policy outlook alongside the combination of inflation and labor-market readings, though in the absence of any new data in those areas, this week will bring a batch of housing-market and consumer-sentiment reports that may capture a slice of the spotlight and add to the overall narrative on the health of the consumer.
Craig Fehr, CFA
Investment Strategy
*FactSet
- Stocks finish mixed after hitting new highs - After closing at record highs yesterday, stocks took a breather today, with the Dow and the Russell 2000 falling. The Nasdaq posted its fifth consecutive gain, helped by mega-cap tech. There were no economic releases on the calendar, and the focus was on corporate news. Shares of FedEx jumped more than 7% after the company exceeded earnings expectations and announced a $5 billion stock-repurchase program. On the other hand, shares of Nike and Lululemon fell on profit warnings, while shares of Tesla declined after reports that the automaker reduced electric-car production at its plant in China as EV sales growth slows*. Despite today's hesitation, stocks ended the week with a sizable gain, which came on the back of dovish central-bank developments. Government bond yields were lower, and the dollar hit a one-month high against major currencies*.
- Easing bias among central banks lifts sentiment - Global equity markets are on track for their best weekly gain this year, as several major central banks reinforced expectations that the start of rate cuts is around the corner. To start with, the Fed maintained its projection for three rate cuts this year despite a stronger growth and inflation outlook. The Fed will remain data-dependent, but the March statement and press conference signaled that the bank has a clear bias toward easing. North of the border, the Bank of Canada's deliberation summary mentioned that the bank sees conditions for rate cuts this year. Also this week, the Swiss National Bank became the first major bank to cut rates, delivering the first rate cut in nine years*. Elsewhere, the Bank of England kept policy unchanged, but a dovish shift in the votes signaled stronger support for rate cuts. The one exception was the Bank of Japan, which hiked rates for the first time in 17 years and ended its yield-curve control policy, but that move was broadly anticipated. In our view, a pivot toward easier policy by most central banks in response to easing inflation pressures, rather than a growth slowdown, strengthens the case for a soft landing and validates the bull market in stocks.
- Holiday-shortened week ahead to cap off first quarter - Next week brings a fresh reading of the Fed's preferred measure of inflation, the core personal consumption expenditure (PCE) price index, though the data will be released when markets will be closed in observance of the Good Friday holiday. Given the already reported consumer and producer prices, which both surprised to the upside in February, we would expect the PCE to also show a strong monthly gain. But that should not surprise markets and might not elicit much of a reaction, especially after Fed Chair Powell downplayed the hotter January and February inflation readings as bumps in the road. With a few days to go, the first quarter has been a very positive one for equities, with the S&P 500 rising almost 10%, supported by ongoing economic resilience, a reacceleration in corporate profits, and expectations for a Fed pivot*. We think that the macroeconomic backdrop will remain positive in the quarters ahead, but markets might enter a choppier phase. While history may not repeat itself, a strong first quarter has been followed by further gains in the remainder of the year. Out of the 13 times the S&P 500 rose by more than 10% in the first quarter since 1936, returns were negative in the following three quarters only once, in 1987*. However, the pace of gains slowed notably, and volatility increased, which is a reasonable expectation this time around.
Angelo Kourkafas, CFA
Investment Strategist
*FactSet
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