ND&S Weekly Commentary 2.5.24 – The Groundhog Predicts an Early Spring as the Federal Reserve Predicts Later Rate Cuts

Last week was filled with Big Tech earnings, economic data, regional bank concerns, and hawkish Federal Reserve comments. Investors remained positive as the S&P 500 and the Dow Jones Industrial Average hit record highs.

The S&P 500 booked a gain of 1.41% for the week and the Dow Jones was up 1.43%. The Nasdaq Composite also moved 1.13% higher. Small companies lagged as the Russell 2000 closed down 0.77%. Foreign markets were also mixed with developed markets (MSCI EAFE Index) flat while emerging markets (MSCI EM Index) gained 0.32%. China’s market has dragged down emerging markets, declining 3.9% for the week. The weakening China economy has pressured commodity prices worldwide. The price of oil fell over 7%, with U.S. crude trading at around $72 per barrel.

The labor department announced that the U.S. economy added 353,000 jobs last month, well above expectations of 170,000. The unemployment rate remained unchanged at 3.7%. The strength of the job market spurred a spike in interest rates with the 10-year Treasury yield jumping 15 bps to 4.03%.
The Federal Reserve kept interest rates unchanged and indicated that there may be a rate cut sometime in 2024 and not likely next month. Jerome Powell, the Fed Chair, wants to have greater confidence that inflation is under control before reducing interest rates.

Last week the concerns over the financial health of regional banks resurfaced. Several smaller regionals announced raising loan loss reserves and higher interest rates on deposits were pressuring margins. The stress on the commercial real estate market, with regionals providing most of the financing, is of concern.

The week ahead includes releases on the ISM Services PMI, and consumer data. Several large bell-weather companies will be reporting. With the geopolitical issues heating up, the election year coming into fold and with a strong but softening economic landscape, we are impressed by the resilience of our economy and financial markets. With the S&P 500 gaining 20% in the last three months, and interest rates slightly moderating, we recommend being well diversified with a high quality and slight defensive bias.

“This is one time where television really fails to capture the true excitement of a large squirrel predicting the weather.” – Phil Connors