Economic Commentary

The S&P 500 has been on a tear in 2024, extending the positive momentum from the end of 2023. February marked the index’s fourth consecutive month of positive returns, contributing to a year-to-date gain of more than 7% and an increase of more than 24% from the late-October low point. After notching a record high in late January, the S&P 500 continued past the 5,000 point threshold in February and closed the month more than 6% above the previous high water mark from January 2022.

Meanwhile, core bonds returned almost 5% in the fourth quarter of 2023 but have faced a more challenging return environment thus far in 2024. As the monetary policy discussion shifted from the prospect of additional rate hikes to the timing and extent of potential rate cuts, the US 10-yr treasury yield fell 70 bps in the fourth quarter of 2023. However, a stronger than expected labor market and indications that inflationary pressures may not be completely extinguished spurred an upward recalibration of rate expectations and a 1% decline in bond prices so far this year.

After keeping interest rates unchanged since July 2023, policymakers at the Federal Reserve acknowledged for the first time in December 2023 that the current policy rate range of 5.25%-5.50% was likely at-or-near peak levels for this tightening cycle. Updated FOMC dot plots showed expectations for three 0.25% rate cuts in 2024, but investors, who apparently thought the Fed was sandbagging, priced in six cuts, the first of which was priced to occur at the March 2024 Fed meeting. Expectations quickly changed however, as messaging out of the January Fed meeting indicated policymakers would not rush to loosen policy without greater confidence that inflation was moving sustainably toward the committee’s 2% target.

Chair Jerome Powell’s position appeared justified following a blowout January jobs report released just two days after the January meeting and further substantiated by a hotter-than-expected inflation report released in February. The jobs report showed a surge in January payroll additions to 353K – the most in twelve months and widely exceeding expectations. The unemployment rate was unchanged at 3.7% marking the 24th month below 4% and wage gains accelerated meaningfully month-over-month and year-over-year. Inflation, as measured by the consumer price index (CPI) decelerated to 3.1% in January but exceeded expectations of 2.9%. Month-over-month, prices increased +0.3% – consistent with December, but above expectations for +0.2%.

While inflation has declined substantially from a 40-year high of 9.1% reached in 2022, the latest report highlighted the choppy nature of bringing inflation back down to the Fed’s 2% target. In a relatively rapid shift from year-end positioning, bond market investors pushed their expectations for timing of the first rate cut out to June or July and now align with the Fed’s December projections for just three rate cuts in 2024.

Looking ahead, several data points scheduled for release over the next few weeks may add clarity to the forward path of monetary policy as the Fed remains data-dependent.

First on the docket is the February jobs report due out on March 8. Consensus expectations call for 190K nonfarm payroll additions and no change to the unemployment rate. If these expectations are in the ballpark, the report will probably calm some nerves as it would represent sharp deceleration in job gains relative to December (+333K) and January (+353K) as well as the 2023 average (+255K). We’ll also be interested in wage growth data contained in the same release which is expected to ease meaningfully month-over-month.

Next, the February CPI report due on March 12 will provide insight into whether recent labor market strength will translate into a rebound in inflation. After falling sharply from a peak of 9.1%, year-over-year inflation figures have been range bound between 3% and 4% for the last nine months. A sharp move in either direction could impact market expectations for the future path of interest rates.

Lastly, the next FOMC meeting, which concludes on March 20 will offer an updated view into the Fed’s calculus, incorporating the new information detailed above among other factors. While there is little chance that policymakers will adjust rates this month (in either direction), we expect an update on the Fed’s plans for quantitative tightening and the committee will deliver an updated summary of economic projections (SEP; basically Christmas for research analysts), which details forward expectations for GDP growth, inflation, and unemployment and includes an updated dot plot highlighting committee members’ expectations for the forward path of policy rates.

Finally, I wanted to briefly address a topic I prefer to avoid – politics. The upcoming presidential election is permeating the headlines and will remain in the forefront for the next eight months. While not technically official yet on either side, trends seem to indicate a rematch between Donald Trump (R) and Joe Biden (D) with odds makers currently favoring Trump by a small margin. I maintain that presidential elections have historically had minimal impact on the markets which are predominantly driven by fundamentals such as corporate earnings, interest rates and other economic factors. Nonetheless, as the candidates provide specific platforms and policy proposals, we will share our views on the potential investment and financial planning implications.

As always, we look forward to sharing our views as we navigate the balance of 2024, and we encourage investors to lean on discipline and the benefit of a long time horizon during periods of uncertainty. On behalf of the entire team, thank you for allowing us to serve on your behalf.