S&P 500 & Nasdaq Notch Best February in Nearly a Decade
Amid a resilient economy and strong AI-related earnings, equities shrugged off inflation worries in February. All three major indices posted new all-time highs, and both the S&P 500 and Nasdaq posted their best February since 2015. US growth (+7.2%) was among the best performers, followed by US mid-caps (+5.8%) and US large-caps (+5.2%). Aside from high yield credits (+0.3%), bonds were mostly down as 7-10 year US Treasuries fell 2.1%, investment grade corporate bonds decreased 1.4%, and the US Aggregate Bond Index declined 1.4%. Commodities produced mixed returns as crude oil and gold rose (+3.4% and +0.5%, respectively) while broad-based commodities and silver fell (-1.4% and -0.9%, respectively).
Markets Slash Rate Cut Expectations
As the fed funds rate remains in the 5.25–5.50% range, investors are anxiously awaiting interest rate cuts from the Federal Reserve. However, after hotter than expected inflation prints were released earlier in the month, the bond market has cooled off its rate cut implications. In the beginning of the year, six 25 bps cuts for 2024 were priced in. Bond traders now see that number to be only three 25 bps cuts, converging with the Fed’s median dot plot projections released in December. Although both January CPI and PPI readings came in above expectations, yesterday’s January PCE release came in level with estimates, calming near-term concerns that inflation was resurging. Nonetheless, both core annualized PCE and CPI are still above target (2.8% and 3.9%, respectively), their descent to 2% appears stubborn, and risks of inflation reaccelerating remain present. Only one month of data is unlikely to affect the Fed’s path for rate cuts, expressed from the FOMC minutes that stated, “Most participants noted the risks of moving too quickly to ease the stance of policy and emphasized the importance of carefully assessing incoming data in judging whether inflation is moving down sustainably.” Per the CME FedWatch Tool, there is currently a 54% chance that the first 25 bps cut will occur at the June meeting.
Did the Fed Make Inflation's Decline Harder?
Since December 2023 when the Fed announced rate cuts ahead, consumers have been more optimistic about the economy and their financial situation. Could this have stimulated hotter growth and inflation?
Is Resurgence Risk Priced In?
Improvements in manufacturing PMIs have historically coincided with increasing commodity prices and ultimately inflation. As manufacturing PMIs are forecasted to improve further, could this increase the risk of inflation resurging?
Longest Weekly Winning Streak Since 1989
The S&P 500 has posted a positive weekly gain for 15 out of the past 17 weeks. This marks its longest winning streak in approximately 35 years.
Strong Economic Data Gives Reason to be Constructive on Markets
We are the most constructive we’ve been on markets in over two years. Why? Throughout that period, investors had to cope with rampant inflation, an abundance of Fed interest rate hikes, negative real rates, an earnings recession, and corporates dealing with wage increase while preparing their balance sheets for a recession that hasn’t occurred. In our view, the environment has recently changed as we’ve come across stronger than expected economic growth, an earnings recovery, positive real rates, rate cuts on the horizon, an anticipated alleviation of funding pressures, and an optimistic setup for a broadening out of the market/change in market leadership.
Among improving PMIs, a resilient labor market, and leading indicators no longer signaling a recession, we’ve recently established an overweight to US equities and reduced negatively correlated alternatives. We’ve maintained our quality exposure but have split our risk towards half equal weight and half quant/smart-beta ranked products as we believe market breadth will eventually increase. At this point, it’s prudent risk management to diversify away from market-cap weighted products with heightened concentration risk.
Though we find the international picture to be trickier in Europe with heightened recession risks and effects of China exporting deflation, we deem Japan to be attractive. It has a combination of appealing estimate revisions, high growth estimates, and strong price momentum while also having a cheap valuation. Additionally, Japan’s projected earnings are expected to outpace both the US and Europe, and its GDP has more room to grow.
On the fixed income side, we’ve been vocal about rotating out of T-Bills and into the capital markets. We are barbelling our risk among corporates, Treasuries, and munis, and we’ve recently added a position in agency mortgage-backed securities which have high spreads, attractive YTMs, and low prepayment risk.
We continue to own gold as an alternative as rates have come down but uncertainty around actual rate cuts remains. Moreover, we remain very bullish on having an allocation to inflation sensitive assets as resurging inflation ignited by lower rates shifting back demand curves seems to be a risk that it not priced in.
Lastly, we believe the market’s behavior will continue to favor large-cap/market-cap weighted quality/growth if economic data stays strong and less rate cuts are anticipated. Until there is more confidence around rate cuts and their timing, we feel small-caps, value, option-overwriting strategies, and EM may continue to struggle.
Warranties & Disclaimers
As of the time of this publication, Astoria Portfolio Advisors held positions in SPYG, SPY, SPYV, SPDW, SPMD, SPSM, SPEM, JNK, SPBO, SPAB, MUB, IEF, SPIP, GLD, SLV, USO, BCI, TLT, and LQD on behalf of its clients. There are no warranties implied. Past performance is not indicative of future results. Information presented herein is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. The returns in this report are based on data from frequently used indices and ETFs. This information contained herein has been prepared by Astoria Portfolio Advisors LLC on the basis of publicly available information, internally developed data, and other third-party sources believed to be reliable. Astoria Portfolio Advisors LLC has not sought to independently verify information obtained from public and third-party sources and makes no representations or warranties as to the accuracy, completeness, or reliability of such information. Astoria Portfolio Advisors LLC is a registered investment adviser located in New York. Astoria Portfolio Advisors LLC may only transact business in those states in which it is registered or qualifies for an exemption or exclusion from registration requirements.