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February 2024 | Equity Commentary

February 2024 | Equity Commentary

 

Published on March 20, 2023

In February, the yield on the 10-year U.S. Treasury bond climbed about 30 basis points higher, to finish the month at 4.25%.1 Market participants and Fed presidents also signaled that rate cuts might come later than previously expected. On January 31, fed funds futures showed 97% of participants anticipating a rate cut by May. By February 29, however, nearly a third of participants weren’t even expecting a rate cut by June.2 Yet, despite higher rates and dashed hopes for rate cuts ‘early and often’ in 2024, stocks surged in the month of February. The S&P 500 rose +5.3% for the month, notching eight new all-time highs in the process.3 If inflation was the main reason expectations for rate cuts were changing, we would not expect equity markets to be performing so well. But it is strong economic growth—not inflation—that is primarily shifting the timeline for cuts, in our view. Investors appear to be reconciling with this reality.    

Q4 earnings season ended late in February, and the results were largely positive both nominally and relative to expectations. S&P 500 earnings grew by 7.8% year-over-year on 3.8% higher revenues. Relative to expectations, the data registered as a 1.2% positive surprise for sales and a 7.2% positive surprise for earnings,4 both of which are solid showings. Artificial Intelligence (AI) continues to be a dominant theme in the realm of corporate earnings, with the biggest name—Nvidia—reporting annual earnings growth of 288%.5 The market rally that accompanied Nvidia’s earnings report propelled it to becoming the third largest company in the world by market capitalization, behind Microsoft and Apple. Other big players in cloud computing like Google, Meta Platforms and Amazon forecast significantly higher spending on AI-related infrastructure, reinforcing the view that AI-related investment is likely to be a secular trend.  

The economy shows few signs of weakening. In February, the Bureau of Labor Statistics reported that total nonfarm employment rose by 275,000, with the unemployment rate ticking slightly higher to a still-low 3.9%. In what may have factored as positive news for equity markets, December and January payrolls were revised lower by a combined 167,000 jobs, indicating the labor market was not quite as hot as previously thought. Providing perhaps another sign of cooling, wage growth decelerated in February but remained positive, with average hourly earnings rising 0.1% and 4.3% year-over-year.6

Inflation as measured by the consumer price index (CPI) came in hotter than expected for January, which sparked some short-term volatility in equity markets. The all-items CPI print for January was 0.3% higher than December’s, and marked a 3.1% year-over-year increase, higher than the 2.9% expected rise. Over two-thirds of the monthly increase could be attributed to shelter costs, however, which rose 0.6%. Shelter costs for homeowners and renters makes up about 34% of the CPI measure,7 while they only account for about 15% of the Fed’s preferred inflation gauge, the PCE price index. The PCE price index’s 2.4% inflation print in January underscores the difference that this shelter weighting makes.8 

The U.S. housing market had a rough 2023, but recent data suggests it may be stabilizing. The National Association of Realtors reported that existing home sales rose 3.1% month-over-month in January to a seasonally adjusted annual rate of 4 million, the highest level in five months. Existing home sales were still down year-over-year, but the uptick from December could mark a turnaround for the housing market, especially considering that 30-year fixed mortgage rates dropped below 7% and may fall further as the Federal Reserve eases later in the year. The inventory of homes in the U.S. is still low. But that may also be driving rising confidence among U.S. homebuilders. In February, a survey of homebuilders showed three straight months of improving sentiment, with higher current sales, expected sales, and prospective buyer foot traffic.9

About a year on from the regional bank crisis of 2023, another mid-sized lender is experiencing fresh troubles. Shares of New York Community Bank (NYCB) fell by more than half10 through the end of February, as investors grow increasingly concerned over its commercial real estate exposure—particularly rent-stabilized multi-family buildings in the New York City area. It appears that NYCB has not set aside sufficient reserves against those exposures, and its 2023 acquisition of Signature Bank New York also added to its overall risk profile. In response to growing concerns, the bank cut its dividend, increased its loan loss provisions, and in early March, raised $1 billion in new equity. The coming weeks and months may be a critical period for NYCB, but the larger takeaway from this story is arguably that weakness in commercial real estate could continue creating pockets of stress in the financial and real estate sectors.

A final note on China, which recently released an economic growth forecast of 5% for 2024. While this forecast was in-line with expectations, it marks a material downshift in growth for China relative to previous years. China announced plans to sell 1 trillion yuan of special treasury bonds in 2024 as a stimulus measure, a rare action that had previously only followed economic emergencies (the Asian financial crisis of 1998, the 2008 Global Financial Crisis, and the pandemic).11 We believe this measure should help growth in 2024 but not propel it in a meaningful way, as China still contends with real estate issues, local governments saddled with debt, weak consumer demand, and deflationary pressures.    

Sources

1.Bloomberg: USGG10YR Index

2.Bloomberg: WIRP Function – Fed Futures

3.Bloomberg: SPX Index TRA

4.Bloomberg: SPX Index EA

5.Bloomberg: Nvdia Equity EM

6.BLS The Employment Situation – February 2024

7.Consumer Price Index Summary – 2024 M01 Results.pdf

8.Personal Income and Outlays, January 2024 _ U.S. Bureau of Economic Analysis (BEA).pdf

9.Existing-Home Sales Rose 3.1% in January.pdf

10.Bloomberg NYCB US Equity TRA

11.China Sets High Bar for Growth—and Turns to an Old Crisis Playbook – WSJ.pdf

As of February 29, 2024

 

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