Welcome to Doug’s Insight

My team of experts are dedicated to sharing their investment knowledge, research and opinions to help you make well-informed decisions. Through thought-provoking articles and thought-leadership pieces, we will continue to strive in offering fresh perspectives and actionable insights on a wide range of topics.

Let’s embark on this enriching journey together, opening our minds to new ideas, expanding our horizons, and embracing the possibilities that lie ahead.

M o n thly M a r k e t C o m m e n t a r y

February 2024

In February, US equity markets accelerated from the strength they had in January, and the S&P 500 was up 5.34%, with the NASDAQ up 6.14%.

On a year-to-date basis, the S&P 500 is up 7.1%, and the NASDAQ is up 7.25%.
Both indexes reached new highs in February.
This is the second-best start for the S&P 500 in the last ten years.
The equity marker rose DESPITE yields rising.
Equity markets tend to do well following reaching new highs.

Small-cap stocks kept up with the large caps in February. The Russell 2000 was up 5.6% for the month, although still lagging on a year-to-date basis, 1.63%.
World equity markets also hit all-time highs in February, including the German DAX and the Japanese Nikkei.
We saw greater "breadth" in performance in February in the US equity markets, not just based on market cap but also sector performance, with five sectors outperforming the S&P 500 and six underperforming.

Growth Stocks still outperformed Value in February.

The Russell 1000 Growth was up 6.8% vs. 3.7% for the Russell 1000 Value in February.

Bond yield crept up over the month of February following negative surprises in inflation reports and continued signs of economic strength.

The yield on the 10-Year Treasury increased in February, from 3.96% to 4.25% by the end of the month.
The ICE BofA US Broad Market index was down 0.77% in February and 1.47% year to date.
The rise in yields offers a better entry point and an opportunity to extend the duration.

Expectations of Fed Funds cuts in 2024 have continued to come down in February.

At the beginning of the year futures markets expected cuts in the Fed Funds rate would start in March, now they are expected to start in June.

Earnings for the 4th quarter of 2023, which were reported in January and February, have turned out strong after a weak start.

With most companies already reporting, the S&P 500 has an earnings growth rate of 4%.

Emerging market central banks started raising interest rates before the Federal Reserve and have subsequently started cutting rates ahead of the Fed.

With the Fed lowering rates in 2024, other central banks will be able to be more aggressive in cutting rates. We feel this presents an opportunity for investors to extend the duration in a declining yield environment.

With the market up significantly early in 2024, we expect to see some backing and filling prior to actual Fed Funds rate reductions and an acceleration of earnings later in 2024.

We also expect more "broadening" of equity market participation, like what we saw in November and December, particularly in the second half of the year.

After a weak start at the beginning of the year, US equity markets started to do well in the second half of January, and that continued into February. Equity markets in the US and around the world hit all-time highs despite bonds being under pressure with increasing yields.

It is good to remember that reaching new highs has not historically been negative for equity markets. According to Edward Jones and Bloomberg, bull markets tend to continue to do well after hitting new highs. The last five times the S&P 500 reached a new all-time high, the index had additional gains of 130% until reaching its eventual new peak.

It was a positive surprise to see equity markets do well despite the rise in yields. Last year, the weakness in equity markets from August through October corresponded with a backup in rates. Equity markets continued up thanks to strength in the fourth quarter earnings (beyond AI names) and indications of continued economic growth, although slowing down, conducive to lower inflation.

Bond yields were up following some disappointing inflation reports. In early February, January CPI (Consumer Price Index) and PPI (Producer Price Index) were both higher than expected, although the Fed's favorite inflation measure, the PCE (Personal Consumption Index), which came out later in the month, was in line. The yield on the 10-year treasury went from 3.96% at the beginning of February, reaching 4.33% on 2/21/2024, before declining to 4.18% on 3/3/2024.

Comments from Fed members, particularly an Interview by Fed Chairman Powell on the TV show 60 Minutes, also pushed against the market narrative of reductions to the Fed Funds rate. At the beginning of February, the expectation was that the Federal Reserve Open Market Committee (FOMC) would start lowering rates at the March FOMC meeting. It has now been pushed out to the June meeting.

The continued strength in the economy was demonstrated by the fourth quarter GDP numbers that were down from the 3rd quarter but still up 3.2%. January Retail sales were also above expectations. The plurality of analysts now think we are going to have a soft landing, and those believing a recession is pending are now a minority, according to a February Bloomberg survey, the lowest since 2022. This corresponds with our belief in moderating but not collapsing economic growth conducive to strong equity performance.

As stated earlier, equities were up despite rising rates, thanks in part to strong earnings. With almost all the S&P 500 reporting fourth-quarter earnings, we see a 4% earnings growth rate for the S&P 500.

Source: FactSet, Data as of 02/2024. Past performance is not an indication of future results. Performance information above does not take into consideration the cost of transactions.

In February, the stock market turned more "Micro than Macro" in that the equity markets reacted more to individual company earnings reports than Macro Economic reports. Although mega-cap tech was an outside contributor to aggregate returns, results were positive across several sectors in February. Earnings are now expected to accelerate into the fourth quarter. The 12-month forward earnings estimate for the S&P 500 is now at a new high from 2022, according to FactSet.

Another one of our themes for a strong market in 2024 is the market broadening in terms of participation, having greater "breadth." We have seen continued strength in big-cap tech, but outperformance by "Magnificent Seven" stocks has not been uniform. Although NVIDIA and Meta Platforms were in the top five in terms of S&P 500 stock returns in February, Apple, Alphabet, and Tesla lagged the market during the month. Small-cap stocks did well in February, and retail stocks also did well after strong reports from Wal-Mart and Ralph Lauren. The best-performing stock in the S&P 500 in February was a UTILITY, Constellation Energy. For the rest of 2024, cyclical value stocks could do relatively better in the second half of the year as the Fed starts rate cuts, thanks to moderate but not collapsing economic growth and a reacceleration of earnings. Although we might see more near-term volatility that 4th quarter earnings season winds down, rising earning will help the market continue higher, following possible drama around the March FOMC meeting, and US government funding deadlines to avoid a US Government shutdown.

The strength of the market in the last four months has been supported by themes we have highlighted in previous reports.

Moderating Inflation.
Moderating but not collapsing economic growth.
Fed ending rate hikes.
Strong Corporate Earnings

We believe there is more upside to the equity market, but the rate of growth will slow, and volatility may pick up, particularly as the 4th quarter earnings season fades and we move toward a new FOMC meeting. We view any near-term sell-off as an opportunity to add equity exposure.

We also view the recent uptick in yields as a mild diversion from a general trend toward Fed Fund cuts and lower yields. Investors should treat this as an opportunity to extend durations.

We saw strength in the stock market last year, but it was extremely focused on very few numbers of stocks, and overall earnings for the S&P 500 were flat. In 2024, we see macro factors becoming less important, and earnings continue to play a bigger role in equity market returns. This "Micro over Macro" environment should not only help equity returns but also broaden market breadth and help the relative performance of active equity managers relative to passive, who are able to focus on Fundamental winners vs. losers within equities.