February 2024 Review and Outlook

Executive summary:

• All major indices made new 52-week highs in February
• S&P 500 closed above 5000 for the 1st time
• S&P 500 reported earnings growth of 4%, the 2nd straight quarter of Y/Y growth
• January inflation data is a bit stickier than expected
• Fed rate cut expectations adjusted to June liftoff

Index performance 

Sector performance  

Markets registered another solid month as U.S. equity indices closed out February in record territory. The Nasdaq Composite, Nasdaq 100, S&P 500 and Dow Jones Industrial Average all made new all-time highs, while the Russell 2000 made a new 52-week high. All sectors finished higher as Consumer Discretionary outperformed (+8.7%), followed by Industrials (+7.2%), Basic Materials (+6.5%) and, of course, Tech (+6.3%). NVIDIA led the way, rising over 28% in February (the stock adding $275 billion in market cap following its earnings report on 2/21, which now stands at nearly $2 trillion). 

The other big story of the month was the hawkish shift in market expectations for the first rate cut from March to June. The FOMC statement released on January 31st, followed by weeks of Fedspeak (including Jerome Powell appearing on 60 Minutes), reiterated how data-dependent the Fed will be, stating, “any adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent.” Fed fund futures are now pricing in a 67% chance of a rate cut in June and three 25bps cuts in total for 2024, which is in line with the Fed’s December SEP guidance.

The disinflation narrative is still intact despite some strong January economic data points. CPI and PPI ran hot, the unemployment rate is still low, and the Fed’s preferred measure of gauging inflation, the PCE price index, had its largest monthly increase in over a year. On the flip side, retail sales for January were weak, while continuing jobless claims hit their highest levels since November (the second-highest reading since 2021). Despite the hot monthly PCE numbers, on an annual basis, PCE continues to decline towards the Fed target of 2% (see below in the “Economic Commentary” for more).

Nasdaq-100 Index one year:

S&P 500 one year:

Rate Cut Odds for June 2024 … 

… and into 2025.

Treasuries:

The U.S. bond market retreated this month as yields rose following hawkish takeaways from the January FOMC meeting that led to a broad repricing of Fed rate-cut expectations (bond price and bond yield are inversely related). The yield on the benchmark U.S. 10-year Treasury now sits at 4.23%, up from 3.88% at the start of the month. The 30-year yield rallied nearly 5% and now sits at 4.365%. Shorter term 2s rallied nearly 10% for the month, now yielding 4.62%. The yield curve remains inverted but is flattening.

10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity:

2-year Treasury yield, one month: 

Earnings commentary: 

Earnings season is nearly over, with 95% of the S&P 500 reporting Q4 results. For large-cap companies, results were better than analysts initially thought, as 73% of the S&P 500 members beat projections (near the 5-year average) and reported growth in earnings of 4%, the second straight quarter of Y/Y growth. For the year, analysts estimate 11% earnings growth for S&P 500 companies. 

SMID names saw the opposite. According to data from Nasdaq’s Economic Team, small-cap earnings are in a recession. The S&P 400 mid-caps are expected to exit this earnings recession in Q4 after four straight quarters of negative earnings growth. However, results were mixed as 6 of 11 sectors saw negative growth. For S&P 600 small caps, their earnings recession is set to continue for the sixth straight quarter in Q4 as 7 of the 11 sectors posted negative results. Analysts project this will continue for the next two quarters.

“A big reason for the ongoing weakness in small caps earnings is that they have a larger share of floating rate debt than large caps, meaning the increase in the fed funds rate over the last couple years has put more pressure on their margins.”

Economic commentary:

January was the third consecutive month where the unemployment rate held steady at 3.7% and the 24th consecutive month with it below 4%. Several of the headline metrics in the U.S. Department of Labor’s February 2nd Employment Situation Report, nonfarm payrolls, private sector payrolls, the unemployment rate and average hourly earnings were all stronger than expected. Job creation jumped to +353,000 vs +185,000 consensus, and average hourly wage growth on a month-over-month basis climbed 0.6% (+0.4% in December). Private sector payrolls increased by 317,000 (+170K consensus), and there were also a number of upward revisions. December private sector payrolls revised to 278,000 from 164,000, and November private sector payrolls revised to 152,000 from 136,000. The labor force participation rate remained steady at 62.5% M/M (slightly below consensus at 62.6%.

January headline CPI ran hot, increasing by 0.3% M/M (consensus was +0.2%, and December was revised lower to +0.2%). Core CPI (also running hot and excludes food and energy) rose 0.4% M/M (consensus +0.3%). On an annualized basis, the total CPI rose 3.1% (above consensus +2.9%) versus +3.4% in December. Annualized core CPI was up 3.9%, in line with December. Shelter continued to rise in January (+0.6% M/M and +6 Y/Y). The food index rose 0.4% M/M and is up 2.6% Y/Y. Declining segments include the used cars and trucks index (-3.4% M/M and is down 3.5% Y/Y) and the energy index (-0.9% M/M and -4.6% Y/Y). This inflation report gives Fed officials enough data to maintain their hawkish tone as to when rate cuts will begin.

Continuing with the hot inflation narrative, January PPI increased 0.3% (consensus +0.1%). January core PPI jumped 0.5% M/M (consensus +0.1%). PPI Y/Y increased 0.9% while core PPI is up 2.0% Y/Y (consensus 1.6%) and above December’s revised print of +1.7%.

Retail sales were weak in January and well below consensus. Total retail sales decreased 0.8% M/M (consensus -0.2%) following a downwardly revised December (+0.4% from +0.6%). Ex-autos, retail sales declined 0.6% (consensus +0.2%).

U.S. Initial Jobless Claims (a leading indicator) for the week ending February 24th were 215,000 (consensus 210,000), above the four-week average of 215,000 claims. Continuing jobless claims for the week ending February 17th rose to 1.905 million, which is the highest level since November, signaling that it is getting harder to find a new job right away.

The U.S. Department of Commerce’s second estimate for Q4’23 GDP showed the economy grew at a slightly slower pace than previously reported at +3.2%, just below the advance estimate of +3.3%. The GDP Chain Deflator (price index) was revised up to 1.6% from 1.5%. 

The Federal Reserve’s preferred measure of inflation declined on a Y/Y basis, creeping closer to the 2% FED target rate. The PCE Price Index rose 2.4% Y/Y, vs +2.6% in December. Core PCE, which excludes food and energy, rose 2.8% vs +2.9% in December. On a monthly basis, the PCE deflator increased 0.3% while core increased 0.4%, which is the largest increase in one year. However, both headline and core were in line with economists’ consensus. 

Personal income increased an unexpected 1% in January (consensus +0.5%), helped by a +3.2% cost of living adjustment for those who receive social security and personal dividend income (which was reflected in January’s market rally). Nominal personal spending slowed to only +0.2% versus December’s +0.7% level. The personal savings rate, as a percentage of disposable personal income (DPI), increased to 3.8% from 3.7% in December. 

CPI Inflation – YoY:

Oil:

Oil futures rose for the 2nd consecutive month, gaining over 3% in February. Geopolitical and macro items continue to be a concern, as well as the potential for more OPEC+ production cuts. Since the December lows, oil futures are up nearly 5%, but since the September peak of $93.68, they have declined 16%. 

According to AAA data, the average cost of a gallon of regular gas in the U.S. is $3.32, up $0.21 or 7% from last month. One year ago, the average price of regular unleaded was $3.3.

Crude Oil front month contract for February:

Dollar:

The dollar rose 1% in February. Since inflation peaked in 2022, the dollar has declined over 7%. A weaker dollar is generally good news for both equity markets and commodities, just as a strong dollar tends to hold back stocks and other risky investments. 

DXY Index for February: 

Looking ahead:

Federal Reserve Chair Jerome Powell will be speaking on Capitol Hill on March 6th and 7th. His comments there may significantly impact how bond and equity markets position themselves for the rest of the year.

On the economic calendar, the February Jobs report is released on March 8th. Economists are expecting the unemployment rate to remain at 3.7%. CPI will be released on March 12, followed by PPI on the 14th. The next FOMC rate decision will be on March 20. On March 15th, we have “triple witch” options expiration and the concurrent S&P Index quarterly rebalancing. 

The information contained herein is provided for informational and educational purposes only, and nothing contained herein should be construed as investment advice, either on behalf of a particular security or an overall investment strategy. All information contained herein is obtained by Nasdaq from sources believed by Nasdaq to be accurate and reliable. However, all information is provided “as is” without warranty of any kind. ADVICE FROM A SECURITIES PROFESSIONAL IS STRONGLY ADVISED.