Looking Back at the Markets in February and Ahead to March 2024

Posted by Brad McMillan, CFA®, CFP® 

Presented by Axial Financial Group

This entry was posted on Mar 5, 2024

February was a good month for stocks, with most markets up in the low- to mid-single digits on positive economic and earnings news. The riskiest indices, the Nasdaq and emerging markets, performed especially well as investors stayed risk-on. Fixed income, on the other hand, generally declined as interest rates rose significantly during the month on fading hopes for Fed rate cuts. These results reflected the broader economy in different ways. But, where growth continues, so does inflation.

Looking Back

The markets and the Fed. Last month’s mixed markets were a battle between rates. They rose sharply before pulling back at month-end but still closed significantly higher. Continued economic growth and the conviction that rate cuts from the Fed weren’t coming any time soon drove the increase, pushing fixed income markets down. And it wasn’t just the Fed, as the economic news suggested that inflation may not keep dropping.

The economy. Fourth-quarter economic growth for 2023 came in stronger than expected, and projections show that this will be the case for this quarter. Job growth was not only solid last month but accelerated, and wage growth and spending increased as well. Last month’s data showed a resilient economy that will likely keep inflation reasonably hot—and keep rates higher for longer.

Looking Ahead

Earnings growth. For stock markets, even though higher rates usually mean lower stock prices, that outcome was overruled by expected strong economic growth, which could continue to support earnings growth. Last quarter’s corporate earnings came in well above expectations, which is the case for this quarter as well. While interest rates and valuations will be a challenge, the strong economy and earnings growth will potentially more than offset that. This means that we still have a reasonable prospect of growth.

Political and international risks. While overall conditions are positive, risks remain. There is the Fed and interest rates. We also have the ongoing war in the Middle East, which is showing signs of expanding and affecting trade routes and supply lines. This could hurt inflation and growth. Further, domestic politics remain a concern as the election gets closer. But with the fundamentals reasonably healthy and the macro picture stabilizing, many economic fears that pulled markets back last year may be subsiding.

Economic growth and inflation. As we move into the year, the key issues remain how fast the economy grows and what that could mean for inflation. Market expectations on rates have changed rapidly. Now, those expectations are more aligned with reality, so the effects of the Fed are likely to be less negative going forward. That said, all of this is data-dependent, and we will need to keep an eye out for changes.

The Bottom Line

Overall, conditions remain solid, but volatility is quite possible. We saw some turbulence in February, and we aren’t out of the woods on inflation yet. While the trends remain positive, risks could increase over the next couple of months. Still, given the strong economic fundamentals, these risks are something to watch for but not worry about too much.

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Disclosures: Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. All indices are unmanaged and are not available for direct investment by the public. Past performance is not indicative of future results. The S&P 500 is based on the average performance of the 500 industrial stocks monitored by Standard & Poor’s. The Nasdaq Composite Index measures the performance of all issues listed in the Nasdaq Stock Market, except for rights, warrants, units, and convertible debentures. The Dow Jones Industrial Average is computed by summing the prices of the stocks of 30 large companies and then dividing that total by an adjusted value, one which has been adjusted over the years to account for the effects of stock splits on the prices of the 30 companies. Dividends are reinvested to reflect the actual performance of the underlying securities. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index. The Bloomberg US Aggregate Bond Index is an unmanaged market value-weighted performance benchmark for investment-grade fixed-rate debt issues, including government, corporate, asset-backed, and mortgage-backed securities with maturities of at least one year. The U.S. Treasury Index is based on the auctions of U.S. Treasury bills, or on the U.S. Treasury’s daily yield curve. The Bloomberg US Mortgage Backed Securities (MBS) Index is an unmanaged market value-weighted index of 15- and 30-year fixed-rate securities backed by mortgage pools of the Government National Mortgage Association (GNMA), Federal National Mortgage Association (Fannie Mae), and the Federal Home Loan Mortgage Corporation (FHLMC), and balloon mortgages with fixed-rate coupons. The Bloomberg US Municipal Index includes investment-grade, tax-exempt, and fixed-rate bonds with long-term maturities (greater than 2 years) selected from issues larger than $50 million. Basis points (bps) is a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 1/100th of 1 percent, or 0.01 percent.