March 25, 2024

“Don’t look for the needle in the haystack. Just buy the haystack!”
John Bogle

Well, the bulls continued their rampage this week, as we look to the end of what so far has been a good quarter, here are the numbers. The S&P 500 finished up for the week 1.54%, the Dow Jones Industrial Average added 1.67% and the Nasdaq added 1.70%. Internationally the FTSE 100 was hot adding 2.63% by the end of the week and the MSCI-EAFE added 1%. The 2-year Treasury closed Friday with a yield of 4.596% and the 10-year closed at 4.202%. 

What drove the market?  One reason can be found in the Fed’s own economic projections. GDP growth is now expected to be 2.1% in 2024, up from 1.4% in its December forecast.

In other words, the economy continues to move along. That’s helping boost corporate earnings despite inflation proving to be difficult and interest rates staying higher for longer than previously expected. The artificial intelligence boom has fueled the rally as well.  There was continued relief in markets over the fact that three rate cuts remain part of the Fed’s 2024 calculus. The Fed kept its policy rate steady in a range of 5.25%-5.5% and made no major changes to its policy statement. However, The Fed has said it does not expect to cut rates until it has greater confidence that inflation is on its way to the 2% target. Many are reading The Federal Reserve’s remarks from Chairman Powell’s press conference, statement, and economic forecasts all point to three rate cuts starting in June, we shall see but the market reacted overwhelmingly positive mid-week, despite the profit taking sell off on Friday.  

Plus, last week’s existing home sales and initial jobless claims data did not deviate from the established narrative.  Also, sales of existing homes “sprung to life” last month, hitting higher-than-expected levels in February, reports Barron’s Shaina Mishkin. Sales of previously owned homes jumped by 9.5% in February to an annual rate of 4.38 million units, the National Association of Realtors reported last Thursday. It was the fastest rate seen since last February. Economists surveyed by FactSet had expected the rate to tick down to 3.93 million. On top of that, construction of new U.S. homes rebounded 10.7% in February to an annual pace of 1.52 million units, the Commerce Department said last Tuesday. That is the biggest gain in nine months. Despite the increase, starts are still below December’s level. Economists on Wall Street were expecting a 7.4% rise in housing starts in February to 1.43 million. All numbers are seasonally adjusted. The number of housing starts in January was revised slightly higher, to a drop of 12.3% to 1.37 million, from an initial reading of a 14.8% drop to 1.33 million. It is still the biggest drop since May 2022. Comparing February 2024 and February 2022, housing affordability fell by 44%, Fleming said, and is now at the same level as in June 2006 — the peak of the real-estate boom. As many homebuyers know, every increase in mortgage rates can have a big impact on borrowers’ monthly payments. The average interest rate on a 30-year mortgage was 3.85% on March 10, 2022, according to Freddie Mac data. That month, a median-priced home cost $375,300, according to the National Association of Realtors. High mortgage rates have not only dampened affordability over the last two years, they’ve also spurred the so-called lock-in effect, where homeowners who have a rock-bottom mortgage rate are not selling their homes, because they don’t want to buy a new one at current rates of around 7%. So….. until the Fed eases rates and mortgages rates fall, the pinch will continue on top of the real effects of the compounding inflation or goods and services, have you been to your favorite restaurant lately? The good news, at least your portfolios are doing well. (tongue firmly in cheek!)

Initial jobless claims data released early last week also showed that layoffs continue to be at a historically low level. The latest figures support the idea that the labor market is “becoming better balanced between demand for and supply of workers which will help moderate upward wages pressures,” writes Stuart Hoffman, a senior economic advisor at PNC.

The other good news was that the market participation continued to broaden out and my number one data point Leading Economic indicators (LEI) finally turned positive last week.

More S&P 500 stocks are participating in the rally that has carried the large-cap index to record territory. As of last Thursday’s close, the percentage of S&P 500 stocks trading at 52-week highs rose to 23%, the highest share in three years, according to Jeff deGraaf, chief market technician at Renaissance Macro Research.

An interesting turn of events (that should support the bull market this year) …. Buybacks of U.S. stocks will grow 13% to $925 billion this year, in bank forecasts, and will climb 16% to $1,075 billion in 2025. The trend is also picking up speed on a net basis. Since 2000, corporations have bought a net $5.5 trillion of U.S. equities — that is a function of share buybacks, cash M&A activity and equity issuance, says Goldman Sachs. However, Goldman Sachs sees a shift in another source of demand. U.S. households were net sellers of $57 billion in U.S. equities in 2023, amid attractive cash yields, but that will flip to them being $100 billion net buyers this year. What does this mean? The corporations are buyers not sellers!

The prospect of a global rate-cut cycle getting started soon is realistic, though. Switzerland became the first major economy to cut rates Thursday in a surprise move by the Swiss National Bank. However, Swiss inflation has been below 2% since June last year, in contrast to the U.S. which has yet to reach that target. Reports Barron’s Callum Keown European Deputy Bureau Chief. Also in Europe, Market Watch reports data Friday showed Germany’s Ifo business-climate index poll of 9,000 businesses rising to 87.8 in March from 85.7 in February, reaching its highest level since June 2023. That beat forecast: Deutsche Bank strategists noted it was 2 points above expectations.

The report added to a positive read on the German purchasing managers’ survey, released a day earlier, but Robin Winkler, Deutsche Bank’s chief Germany economist, and Mark Schattenberg, senior economist, said the “surprising recovery in business sentiment will not be enough to avert a contraction in [the first quarter of 2024] and thus a technical recession over the winter.”

So as everything is coming up roses this spring both home and abroad, will this bull run continue? It sure looks like it.

Mike