Market & Economic Commentary

Market Commentary For the week of March 4, 2024

ECONOMIC REVIEW

  • Gross Domestic Product (GDP) is a country’s primary measure of economic output. GDP is revised two times after the initial reading before being considered final. The first revision to the original was released on Wednesday.
  • GDP was revised slightly downward, to 3.2%, from 3.3% on an annualized basis.
    • The revision came primarily from a downward move in Private Inventories.2
  • The fourth quarter revision brought the 2023 cumulative GDP reading to 2.5%, slightly above the long-term growth rate of 2%.
  • The Personal Consumption Expenditures Price Index (PCE) increased by 0.3% last month. Excluding food and energy, the core measure of the index rose 0.4%.
  • On a year-over-year basis, the headline index figure rose 2.4% and 2.8% for the core number.
    • As a reference, the Federal Reserve’s (Fed’s) target level of year-over-year inflation is 2.0%.
  • PCE continues to see elevated levels of inflation coming specifically from the service side of the economy.
    • Prices for services increased by 3.9% year-over-year, whereas the price of goods decreased by -0.5%.3

How does PCE and GDP impact you?

  • GDP growth is seen as a positive economic factor, and last quarter’s readings, even with the downward revision, are still above the long-term trend for the U.S.
    • Economic growth, however, can provide upward stress on prices, leading to higher inflation.
  • The continual downward move in inflation measured by PCE remains a strong signal that inflation is moving in the right direction, although some progress still needs to be achieved.
  • When both indicators are taken in conjunction, slowing inflation and a resilient economy, it bodes well for the Fed to achieve its sought-after soft-landing.

LOOK FORWARD

  • Next week, investors will be focused on the labor market, highlighted by the JOLTS and the Jobs Report releases.
  • After last month’s strong report, consensus expectations are for the labor market to loosen slightly versus last month but remain strong.

How does the labor report impact you?

  • A strong labor market was one of the main reasons consumers remained strong throughout 2023 and the start of 2024.
    • A substantial weakening of the consumer as we continue the year could adversely impact economic growth.
  • The Fed has a dual mandate to keep price inflation under control and maintain maximum employment. The strength of the labor market, mainly based on demographic changes and hangover hiring from the pandemic, has allowed the Fed to focus on tackling inflation.

MARKET UPDATE

Market Index Returns as of 3/01/2024WTDQTDYTD1 YR3 YR5 YR
S&P 5000.99%7.97%7.97%31.11%11.63%14.78%
NASDAQ1.76%8.55%8.55%43.12%7.64%17.45%
Dow Jones Industrial Average0.00%4.09%4.09%20.97%9.79%10.81%
Russell Mid-Cap1.63%4.69%4.69%15.35%5.18%10.33%
Russell 2000 (Small Cap)3.00%2.62%2.62%10.86%-1.05%6.92%
MSCI EAFE (International)0.72%3.23%3.23%15.36%4.23%6.88%
MSCI Emerging Markets-0.30%0.27%0.27%7.35%-6.65%1.95%
Bloomberg US Agg Bond0.47%-1.30%-1.30%4.65%-3.01%0.68%
Bloomberg High Yield Corp0.20%0.47%0.47%11.60%1.80%4.18%
Bloomberg Global Agg0.26%-2.43%-2.43%3.93%-5.48%-0.94%

OBSERVATIONS

  • Major U.S. equity indices finished flat or positive after in-line GDP and inflation data prints continued to point towards a soft economic landing.
  • Small caps were the best performer of the week. As inflation comes down, it aids the case for a drop in interest rates, which tends to relieve smaller companies disproportionately.
  • International Markets outperformed the Dow Jones, but lagged the NASDAQ and S&P 500, and continued to trail YTD.
  • Emerging Markets were the only negative-performing category. China, which is a hub for Emerging Markets, continues its struggle to exit its economic backslide.
  • Bonds posted a second consecutive week of positive returns, though they remain negative YTD, excluding High Yield securities, which have performed well thus far.

BY THE NUMBERS

  • Elon Musk Sues OpenAI and Sam Altman for Breach of Contract: The lawsuit alleges that OpenAI’s agreement with Microsoft violated their original mission of building artificial intelligence for the benefit of humanity rather than for profit. Musk alleges that he, who helped co-found OpenAI in 2015, was “induced” to make his contribution which totaled $44 million under the illusion that the company would remain a non-profit. Microsoft is licensed to use OpenAI’s “pre-AGI” technology. AGI artificial General Intelligence) is the threshold where computers operate at or above a human’s level of intelligence. The case will likely hinge on whether ChatGPT-4 is an AGI model, and therefore in violation of the Microsoft licensing agreement. Since ChatGPT-4 is one of the main focuses of development at OpenAI, if it breaks the threshold for being classified as AGI it may be violating the not-for-profit focus defined by the OpenAI mission statement.
  • Market Leap Day Performance: Going back to 1952, there have been 14 trading days that occurred on February 29th. Despite Thursday yielding strong market performance, it marked only the 5th positive leap day for markets. The S&P 500 has only been positive on roughly 36% of leap days opposed to the 52% on any given day. In fact, the median market pullback on leap days is -0.3% which is in contrast to the median rise of 0.05% seen on all other days since 1952. The small sample size of data points, however, makes this trend not accurate at forecasting future returns, and is belittled by other seasonal trends witnessed by markets. The positive performance seen on Thursday has been a reflection of strong earnings, and a continuation of the rally that began in late October of 2023 as inflation continues to slowly drift lower, and the economy remains resilient. This year has already ushered in strong performance with the first two months of the year showing the best returns on the S&P 500 since 2019.

Reprinted with permission from BTN. Copyright © 2021 Michael A. Higley.

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Market Commentary For the week of February 5, 2024

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