April 8, 2024

“Know what you own and know why you own it.”

 Peter Lynch

All good things come to an end. After a stellar first quarter the markets decided to take a breath. Here are the numbers. The S&P 500 lost 1.02%, Dow Jones Industrial Average retreated 2.27%, the Nasdaq trimmed 1.31%, internationally, the FTSE 100 lost only, 26% and the MSCI-EAFE finished the week off 1.3%. The 2-year Treasury closed with a yield of 4.772% and the 10-year paid 4.39%.

Last week’s excitement, on top of the pullback in stocks, gave Wall Street a big jolt last week besides the multiple earthquakes that shook New York City and its surroundings. For many in the New York area, that day will go down as New Yorkers first real earthquake experience — a 4.8 quake this morning followed by a 4.0 aftershock around 6 p.m.  A close friend who lives in the bay area of California remarked to me “Oh Please!” This week, it is the solar eclipse today. The market retreat last week begs the question, is this a hiccup or the harbinger of things to come? Investors had expectations the Federal Reserve would deliver around six quarter-percentage point rate cuts by year-end, beginning in March. Those expectations have since been reduced to around three rate cuts, according to the CME FedWatch Tool. March, of course, came and went with no cut.

Well, as Market Watch reported, stocks still rallied to a series of record highs, with the S&P 500 index logging a first-quarter gain of just over 10%. Last Friday, rate-cut hopes took another hit after a blowout March job report the Bureau of Labor Statistics reported that the U.S. economy added another 303,000 jobs in March, well above the 205,000 estimate. No one was even close to predicting today’s 300,000-plus blowout. With the fall in the unemployment rate to 3.8% from 3.9%. The probability of a June cut now stands at just a little better than 50%. The Fed’s story, as told by Chair Jerome Powell, has been that the labor market is softening and the level of interest rates is putting enough downward pressure on demand, which, if it continues, should keep inflation moving lower, allowing the Fed to cut interest rates sometime this year. But the hot March unemployment report seriously dented this story. Former Treasury Secretary Lawrence Summers put it succinctly on Friday. “It looks like the economy is reaccelerating and that the Fed’s interest-rate stance is not so tight,” Summers said in his weekly comments on the economy on Bloomberg Television. This prompted a potential blow to housing affordability, mortgage rates ticked up in the latest week. But home buyers still have reason to be optimistic, as inventory is also increasing, in many parts of the country. The 30-year fixed-rate mortgage rose, averaging 6.82% as of April 4, according to data released by Freddie Mac, last Thursday. A year ago, the 30-year rate was averaging 6.28%. The average rate on the 15-year mortgage was 6.06%, down 5 points from 6.11% last week. The 15-year was at 5.64% a year ago.

Also noted, with first-quarter earnings reports just around the corner, the biggest battles with inflation might be out of the way for businesses and their customers. The impact on the smaller ones could just be starting. Also on the inflation front, Oil rose to $86 per barrel, but last Thursday during the market sell off to their highest level since October. The price of Brent crude, the international benchmark, rose 1.5% to $90.65 per barrel, if you filled your tank this weekend is already obvious to you, amazing how retailers are so quick to raise the prices. Oil has rallied to begin 2024, alongside gains for several other commodities. The escalation of tensions in both Iran and Ukraine, not to mention the war raging in Gaza, coupled with members of the Organization of the Petroleum Exporting Countries and its Russia-led allies. known as OPEC+ adding fuel to the fire (sorry for the bad pun).

Job growth looks strong but the number of Americans who applied for unemployment benefits last week rose to a nine-week high of 221,000. The read is quite low and didn’t show any deterioration in the labor market, according to government figures. How can that be? The key is to see what kind of jobs are being added, not high paying skilled jobs but a lot of part-time and second jobs dominating the number, so either you take a second job or go on unemployment if you have been laid off.

So where is the good news? After the consumer confidence numbers, the slow erosion in the inflation rate. Last Friday, for instance, the core personal consumption expenditures (PCE) index, which is the Fed’s preferred inflation measure, rose just 2.8% year over year and 0.3% month over month, as expected, in February. The production gauge was up to 57.4%. The prices-paid index, (a measure of inflation), fell 5.2 points to 53.4%. It’s the lowest reading since the pandemic. The economy has largely shrugged off the highest interest rates in 23 years and is growing at an above-average speed.

From oil and gasoline to gold and silver, commodities have started the year on a high note, with some surging to levels not seen in years. So, our position in these sectors is being rewarded. On top of that our defensive posture looking to value over growth coming into this year seems to be gaining fans. As MarketWatch reports, after the leading large-cap growth names stumbled in March, several Wall Street strategists are recommending that their clients give large-cap value stocks a look. In a pair of research reports seen by MarketWatch, strategists touted value stocks’ lower valuations, higher dividends and the fact that they’re under-owned by long-only portfolio managers as reasons to consider buying. Plus, value stocks’ stronger balance sheets could help shield them from the likely fallout should accelerating inflation prevent the Federal Reserve from delivering on the three interest-rate cuts investors have priced in for 2024.All of these factors make a “compelling case” for considering value stocks, according to Bank of America Global Research’s Savita Subramanian. “One bear case we hear is that the S&P 500 is expensive on almost all metrics, relative to its own history. We resist this as the most compelling bear case given composition and quality differences over time,” Subramanian said in a report received by MarketWatch last Monday. “But for more value-sensitive investors,” he wrote, “we see a very compelling case to be made for large-cap value stocks.”

With the Federal Reserve caution, to say nothing of tax season and the political season all upon us, many policymakers realize the situation is volatile. So, a little market excitement seems more than natural.

Enjoy the solar eclipse, and if the world is still here after 1:54 CST, we all survived any cataclysmic predictions.

Mike