Stocks Trade Higher in February as the Rally Broadens Out

Monthly Client Update | March 1, 2024

Monthly Market Summary

  • The S&P 500 Index gained +5.2%, underperforming the Russell 2000 Index’s +5.6% return. All eleven S&P 500 sectors traded higher, with cyclical sectors outperforming.
  • Corporate investment-grade bonds produced a -1.9% total return as Treasury yields rose, while corporate high-yield bonds produced a +0.3% total return.
  • International stocks underperformed U.S. stocks. The MSCI EAFE Index of developed market stocks returned +3.0%, while the MSCI Emerging Market Index gained +4.2%.

 

Stocks Trade Higher for a Fourth Consecutive Month, While Bonds Trade Lower

Stocks traded higher in February, with the rally broadening after large cap stocks accounted for most of January’s gains. The S&P 500 traded above 5,000 for the first time, setting a new all-time high, and has now returned +21.5% since the start of November. The Dow Jones Industrial Average set a new closing high in February, and the Russell 2000 Index of small cap stocks outperformed the S&P 500 after trailing by -5.5% last month. The Consumer Discretionary, Industrial, and Material sectors outperformed the S&P 500, while the Utility, Consumer Staple, and Real Estate sectors underperformed.

In the credit market, bonds traded lower for a second consecutive month as two themes caused rates to rise. First, the Federal Reserve told investors it wants more confirmation that inflation will return to its 2% target. This statement effectively pushed back the timing of the first interest rate cut. Second, multiple inflation reports were hotter than expected, hinting at sticky inflation. This year’s bond sell-off suggests the market got ahead of itself by forecasting too many rate cuts. Investors now expect three rate cuts this year, a decrease from the forecast for six rate cuts at the start of the year.

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 slowest since March 2021.

Investors and the Federal Reserve are debating 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 has risen by +9.2% year-to-date and currently trades at a 3.5-month high, while gas prices have risen by +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.

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Definitions

Annualized Return: The rate at which an investment grows each year over the period to arrive at the final valuation.
Bear Market: A decline of at least 20% from the market’s high point to its low.
Beta: A measure of how an individual asset moves when the overall stock market increases or decreases.
Correlation: A measure of the extent to which two variables are related.
Dividend Yield: The dividend yield or dividend-price ratio of a share is the dividend per share, divided by the price per share. It is also a company’s total annual dividend
payments divided by its market capitalization, assuming the number of sharesis constant.
Developed Markets: A country that is most developed in terms of its economy and capital markets. The country must be high income, but this also includes openness
to foreign ownership, ease of capital movement, and efficiency of market institutions.
Emerging Markets: A country that has some characteristics of a developed market but does not fully meet its standards. This includes markets that may become
developed marketsin the future or were in the past.
GrowthFactor Stocks: Growth stocks are companies expected to grow sales and earnings at a fasterrate than the market average.
LargeCap Stocks: Shares of publicly traded corporationswith a market capitalization of $10 billion or more.
LTM: An acronymfor”Last Twelve Months”or the past one year.
NTM:An acronymfor”Next Twelve Months” or the next one year.
Price Return: The rate of return on an investment portfolio, where the return measure takes into account only the capital appreciation of the portfolio, not including
income generated in the form of interest or dividends.
Total Return: Return on a portfolio of investmentsincluding capital appreciation and income received on the portfolio.
Small Cap Stocks: Small-cap stocks are shares of companieswith a market capitalization of less than $2 billion.
Standard Deviation: In statistics, the standard deviation is a measure of the amount of variation or dispersion of a set of values. A low standard deviation indicates the
valuestend to be close to the historical average of the data set, while a high standarddeviationindicatesthe current value is outside of the historical average range.
Value Factor Stocks: Stocksthat are inexpensive relative to the broad market based on measures of fundamental value (e.g., price to earnings or price to book).

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