March 4, 2024

“Focus on value because most investors focus on outlooks and trends.”

Sir John Templeton.

With the name of the game to grow and preserve wealth in these unusual times, I will continue to preach value. Especially because most of my clients are retirees or pre-retirees. Here are the numbers last week. The S& P 500 finished the week up again .87%, the Dow was slightly off by Friday .15% the Nasdaq continued its tear up 1.87%. Internationally, the FTSE 100 was off a bit down.31% and the MSCI-EAFE gained a slight .06%. 2-year Treasury yield closed at 4.533% and the 10-year paid 4.186%.

Markets shook off looming concerns over inflation and the Fed’s future rate trajectory with more record highs in February, driving the S&P 500® up 5%. With a consistent tailwind of interest in AI and generally better than expected Q4 earnings, mega caps continued to show strength with the S&P 500 Top 50 up 6%. While small caps lagged, the rally began to broaden with mid-caps slightly outpacing their large-cap counterparts, with the S&P Midcap 400® up 6%. All sectors posted gains, led by Consumer Discretionary and Industrials.

The industrial side of the economy has been showing signs of recovery after a long stretch of weakness. Orders for durable or long-lasting goods sank 6.1% in January, but the decline was exaggerated by a brief lull in orders for Boeing passenger planes. Economists polled by The Wall Street Journal had forecast a 5% decline. Customer spending is strong on the prospect of lower interest rates later in the year (???).  The growth rate of the U.S. economy in the fourth quarter was downgraded slightly to a 3.2% annual pace, but the economy is still expanding at a rapid clip and showing few signs of slowing down. Originally, the government said gross domestic product had expanded at a 3.3% rate in the final three months of 2023. The figure is adjusted for inflation.

The increase in fourth-quarter GDP followed an even stronger 4.9% gain in the third quarter. The economy does not appear to have lost a step early in the new year, Despite high interest rates and pesky inflation.

The latest forecasts suggest the U.S. is expanding at a rate of over 3% in the first quarter. The economy’s top sustainable speed in the long run is generally seen at around 1.8%.

What makes the recent strength even more remarkable is that it has taken place despite the sharply higher interest rates orchestrated by the Federal Reserve to tame high inflation. This could boost demand and make it easier for companies to borrow and invest. Consumer spending, the main engine of the economy, was revised up to show a 3% increase in the fourth quarter instead of 2.8%, as Barrons’ Megan Leonhardt noted. The muted performance came after the second estimate of fourth-quarter GDP growth was revised lower to 3.2%. That’s down from the initial projection of 3.3% that blew expectations out of the water. But the downward revision wasn’t due to less consumer spending but rather declines in inventory investment thanks to already high existing inventories. In fact, household outlays were revised up to 3% from 2.8% and government consumption was revised up to 4.2% growth from 3.3%. As Alex Eule of Barrons reports, “The reality is that the U.S. economy is simply not slowing down, and the Fed pivot has provided a strong tailwind to growth since December,” Torsten Slok, chief economist at Apollo Global Management wrote today. Slok expects, contrary to prevailing opinions, “as a result, the Fed will not cut rates this year and rates are going to stay higher for longer.”

Consumer spending accounts for about 70% of U.S. economic activity. The U.S. consumer took a breather in January, but inflation stickiness still remained “apparent,” which could delay the Federal Reserve’s rate-easing cycle until mid-year 2024 if at all.

On the jobs front, initial jobless benefit claims rose by 13,000 to 215,000 in the week ended Feb. 24, the U.S. Labor Department said last Thursday. Economists polled by The Wall Street Journal had estimated new claims would rise to 210,000. Claims have been bouncing around low levels. Economists detect some softening in the labor market and do not expect claims to remain so low in coming weeks. Stepping back, the data suggests continued solid economic growth and stable unemployment.

What about housing and mortgages as we start the traditional spring selling season?

U.S. mortgage rates rose for the fourth week in a row to a two-month high, in a major blow to housing affordability. The 30-year fixed-rate mortgage rose and averaged 6.94% as of February 29, according to data released by Freddie Mac FMCC, -0.92% on Thursday.: “The recent boomerang in rates has dampened already tentative homebuyer momentum as we approach the spring, a historically busy season for homebuying,” Sam Khater, chief economist at Freddie Mac, said in a statement.

The final significant factor to your wallet is… Sen. Mitch McConnell (R-Ky.) will step down as Senate GOP leader in November, ending a record 17-year tenure at the helm. Mr. McConnell has been Senate GOP leader since 2007. He was majority leader of the Senate between 2015 and 2017 and minority leader between 2007 and 2015 and again in 2021. This, plus the fact that this month Ronna McDaniel will yield the control of the RNC to President Trump’s preferred candidates, only confirms what Wall Street has begun hinting, that Trump is consolidating his grip on the Republican party and if he wins will make dramatic changes to policy, a fact Wall Street is beginning to price in. As I began commenting earlier this year, Wall Street is beginning to believe that President Trumps return is becoming more likely, as such, a new Trump term would likely translate to four years of outperformance by U.S. stocks compared with their international peers. Tom Essaye, publisher of Sevens Report Research, pontificates, “Trump has been vocal about his plans to double down on his international trade policies if elected, which would likely mean increased tariffs on imports from China — and elsewhere. He has threatened 60% tariffs on all Chinese goods entering the U.S., while, critics say, habitually misrepresenting tariffs as being borne by the country of goods’ origin.”

“Obviously, those policies would be negative for Chinese shares and emerging markets more broadly, as they would increase trade tensions,” Essaye said. To say nothing about closing the border and dealing with the influx of illegal aliens pouring across the border the past 3 years.

Ah the fun is just beginning….. with Super Tuesday this week, more decisions coming on the many lawsuits and court cases, so strap it up and witness some unprecedented events, but in the near-term, markets seem to be plowing ahead.  However, our international exposure may begin to change in the coming months.

Mike