Market Commentary 3/11/24

Stocks Trade Higher in February for a Fourth Consecutive Month While Bonds Decline

Stocks traded higher in February, with the rally broadening after large cap stocks accounted for most of January’s gains. The S&P 500, with a monthly gain of 5.2%, traded above 5,000 for the first time. The Dow Jones Industrial Average likewise set a new closing high in February, and the Russell 2000 Index of small cap stocks gained 5.7% for the month after declining 3.9% in January. The Consumer Discretionary, Industrial, and Material sectors outperformed the S&P 500, while the Utility, Consumer Staple, and Real Estate sectors underperformed.

Conversely, bonds traded lower for a second consecutive month as two themes caused rates to rise. First, the Federal Reserve communicated it wants more confirmation that inflation will return to its 2% target. This statement effectively pushed back the timing of an interest rate cut. Second, multiple inflation reports were hotter than expected, hinting at persistent inflation. This year’s bond sell-off suggests the market got ahead of itself by forecasting too many rate cuts, and we suggested this may be the case in our previous commentaries.

Investors now expect three rate cuts this year, a decrease from the forecast for six rate cuts at the start of the year. However, we are willing to entertain a scenario where the Fed does not cut rates during 2024.

Commodity Price Index Trades Near a 2-Year Low, But Energy Prices Are Rising

The Bloomberg Commodity Index, which tracks a broad group of commodities, currently trades at its lowest level since December 2021. It’s been a volatile two years. Commodity prices spiked in early 2022 after Russia’s invasion of Ukraine disrupted the energy, metal, and agriculture markets. The sharp rise in commodity prices sent inflation soaring above 9% in June 2022, the highest level in 40 years.

Since peaking in mid-2022, commodity prices and inflation have both trended lower. The consumer price index rose by 3.1% year-over-year in January 2024, the lowest increase since March 2021.

Investors and the Federal Reserve are weighing the risk of a second inflation wave. The price declines across commodity markets helped ease inflation pressures, but there are questions about whether the trend can continue.

The price of crude oil is up 9.2% year-to-date and currently trades at a 4-month high, while gas prices have risen 13.3% this year. With the summer driving season fast approaching, there is concern that gasoline prices could continue to rise.

Investors will be watching other commodity markets to see if prices start to rise, as that could delay the Fed’s plan to cut rates.

We will continue to monitor the investing environment and keep you up to date on significant matters. Please contact us at any time with questions.