Apr 1, 2024

Last Year’s Rally Spills into 2024

Weekly Market Commentary

Stocks turned in a surprisingly strong 2023, and momentum has yet to slow in 2024 as last year’s rally remains in high gear.

According to Dow Jones Market Data published by MarketWatch, the S&P 500 Index set 22 all-time closing highs this year. Likewise, the Dow notched 17 closing records, and the Nasdaq Composite recorded four new closing highs.

There’s been no shortage of chatter that a few large companies have fueled the advance, while many other firms have failed to participate or have lagged the broad-market indexes.

Well, that appears to be changing. The S&P 500 Index is a market-capitalization-weighted index, which simply means that large companies have a greater influence on the index than the smaller companies. Last year, a few large companies played a key role in the market’s advance.

However, if we equal weight all 500 firms, such a gauge also set multiple new highs in March, according to S&P Dow Jones Indices.

Further, ten of the eleven major sectors of the S&P 500 Index are up this year, according to the Wall Street Journal. That is to say, the rally has broadened.

Fueling the rally

What’s driving shares higher? Let’s review three major pillars.

1. Enthusiasm for AI has yet to wane. AI is aiding the tech sector.

2. The Federal Reserve is anticipating three quarter-point rate cuts this year. Yet, that’s below the six or seven quarter-point rate cuts that investors were eyeing in January (CME Group). 

Moreover, the modest rise in the yield on the 10-year benchmark Treasury since the start of the year has done little to dampen bullish momentum.

Investors aren’t opposed to lower interest rates, but the market doesn’t appear entirely reliant on a less restrictive Fed policy. Therefore, the expanding economy and rising corporate earnings appear to be doing much of the heavy lifting.

3. The economy is defying expectations. A much-forecasted recession never materialized, and economic growth has fueled S&P 500 corporate profits, which rose 10% in the fourth quarter of 2023 versus one year ago (LSEG, formerly Refinitiv).

We recognize that past performance is no guarantee of what may happen down the road. Any number of unwanted surprises could change the narrative. We also recognize that even in a bull market, stocks can experience a decline.

But we also want to point out that when the S&P 500 Index rises by 8% or more in the first quarter, as it did this year, the index ends the year up 94% of the time, with an average gain of 9.7% over the next three quarters, per Dow Jones Market Data for S&P 500 performance since 1950.

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A Steady-as-She-Goes Fed and a Tame Inflation Report

As expected, the Federal Reserve announced last Wednesday that it held its key rate, the fed funds rate, unchanged at 5.25 – 5.50%. The Fed left the door open to a cut in rates later in the year if inflation makes meaningful progress toward its 2% annual goal or if there is an unexpected weakening in the labor market.

Strong Jobs Report, with a Caveat

The U.S. Bureau of Labor Statistics reported that nonfarm payrolls in May rose 272,000, easily beating expectations of 190,000 per the Wall Street Journal. Over the past three years, nonfarm payrolls have usually topped expectations. That narrative remains intact.

Housing Prices Hit New Record

The price of a home hit a new record, according to the latest data on housing prices. The S&P CoreLogic Case-Shiller 20-City Home Price Index, which measures monthly housing prices in 20 major metropolitan areas, rose 1.6% on a nonseasonally adjusted basis in March.

Drifting Higher

Stocks have been drifting higher for several weeks as investors search for a catalyst that could drive shares in either direction. Interest rates can influence market direction, but there hasn’t been much news recently on the rate front.

How Do Investors Spell Relief?

Investors celebrated an ‘in line with expectations’ CPI that suggested the rate of inflation isn’t accelerating. It’s a small win, but it was enough to send the three major market indexes, the Dow, the Nasdaq, and the S&P 500 to new highs.