The Month At-A-Glance
- After surpassing its all-time high in January, the S&P 500 powered through the 5,000 level to finish the month 5.3% higher.
- Momentum within growth stocks continued, with Russell 1000 Growth adding 6.8% in February, which brings its trailing one-year return to nearly 46%!
- Resilient economic data and stickier inflation readings pushed back on market expectations for rate cuts in 2024.
- The longer end of the U.S. Treasury yield curve moved higher during the month, resulting in a 1.4% loss for the Bloomberg U.S. Aggregate Bond Index.
Market Recap
Global equity markets notched another solid month. U.S. large-cap growth stocks led the way (yet again). The Russell 1000 Growth Index’s year-to-date return is already shy of 10%—trouncing value stocks for another month.
Enthusiasm about the prospects for AI has propelled growth stocks higher as investors expect many of these companies to continue to operate with the wind at their backs. The decade of the 2010s also saw growth stocks beat value stocks. However, it was a prolonged “death by a thousand cuts.” Violent swings in both directions have marked the outperformance of growth stocks so far in the 2020s. Value stocks have underperformed by greater than 30% on two occasions over a trailing 12-month period and outperformed growth stocks by well over 20% during 2022.
Foreign equity markets joined the rally in February. Emerging market stocks outpaced developed international thanks to a bounce in Chinese markets. The MSCI Emerging-Markets Index returned 4.8%, with Chinese equities (MSCI China) gaining 8.4%. U.S. dollar strength pared gains for developed international stocks. MSCI EAFE logged a 3% return in local currency terms but, when converted to U.S. dollars, gained 1.8%. Japanese equities remain among the top-performing equity markets this year. The Nikkei 225 Index reached a new all-time high that had been in place since the late 1980s! Japanese equities continued to rise despite a weaker-than-expected fourth-quarter GDP figure that put Japan’s economy into a technical recession (two consecutive negative GDPs).
The Bloomberg U.S. Aggregate Bond Index fell 1.4% in February as longer-term rates moved higher amid the repricing of the timing and the likelihood of fewer rate cuts this year. The yield on the U.S. 10-year Treasury closed February at 4.25%, roughly 25 basis points higher from the end of the previous month. The yield curve (chart below) remains inverted, though less so than last year’s second quarter. An inverted yield curve has historically been an indicator of a looming recession. However, the record amount of time the yield curve has been inverted during this cycle has called into question its usefulness as a timing tool. A closer look at the three-month/10-year yield spread would show recessions typically occur after the yield curve reverses. While a recession call is not our near-term scenario, we believe the longer the Federal Reserve holds short-term rates at higher levels, the more likely the economy could falter. The Fed has historically been too slow to commence both hiking and cutting cycles.
Notable Events
Market expectations for rate cuts continue to be priced out of the market as Fed officials continue to reiterate their desire to gain greater confidence that inflation is moving towards their 2% target. Upside surprises in consumer and production prices in the January readouts did not help those betting on sooner rather than later rate cuts. As many as six rate cuts were priced in at the start of the year, but now the expectation is closer to three cuts (which aligns with the Fed’s December projection).
The above consensus figures on CPI (consumer price index) and PPI (producer price index) reinforce the Fed’s wait-and-see approach to inflation. Core CPI for January registered at 3.9% compared to a consensus estimate of 3.7%. PPI notched a monthly gain of 0.3% (versus 0.1% forecast) and increased 0.9% year-over-year (versus 0.6% forecast). The Fed’s preferred inflation measure, core PCE, was released in late February and seemed to alleviate some fears over the hotter-than-expected CPI and PPI numbers. Core PCE came in at 2.8%—still above the Fed’s target—which was right in line with market expectations. However, core PCE’s 0.4% month-over-month increase was the highest reading in the last 12 months. (chart below).
Certain material in this work is proprietary to and copyrighted by Litman Gregory Analytics and is used by Argent Financial Group with permission. Reproduction or distribution of this material is prohibited, and all rights are reserved.
