“Markets are never wrong, only opinions are.” – Jesse Livermore
February is historically a month that the stock market struggles. This has not been the case thus far in 2024 as the major US-based indexes we follow were all solidly positive for the month, as were the global indexes. Higher yields, not the widening of spreads, have been the cause of weakness in the bond indexes. The CRB Commodity Index, while showing strength, is being propped up by the strength of oil. Digging into the returns it is notable that most all of the metals are negative for the year while natural gas is down 25% since the start of the year. The US Dollar index was modestly higher for the month.
All data as of 03/01/2024, Source: Wells Fargo Investment Institute. An index is not managed and not available for direct investment. Past performance is not a guarantee of future results. [Wells Fargo Investment Institute, Inc. is a registered investment advisor and wholly-owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.]
In our February Outlook, we made the case for a continued strong economy, taking note of several factors that we have been monitoring that we believe could have negative economic implications. We believe this analysis remains valid and positive for the stock market going forward.
This month, we wanted to refocus on what is happening in the stock market. Returns have been positive to start the year, but what about the next few months? The rest of the year?
As is always the case, opinions vary. At Magellan Financial we certainly have opinions, but we understand that the markets don’t care what we think. We understand that in the short term, the stock market often moves based on emotions. We also understand that over the long-term company earnings and profit margins determine market direction. In the words of Warren Buffett, “in the short run, the market is a voting machine, but in the long run, it is a weighing machine.”
We aren’t here trying to “predict” the market. Instead, we are trying to understand what is happening and what factors will help shape the market’s future direction considering both potential positive and negative influences on the markets. Here are several factors we believe are currently important:
Factors driving market optimism:
- Slowing Inflation: After experiencing nearly 18% inflation over the past three years, there’s a glimmer of relief. As of January 2024, inflation has moderated to a year-over-year rate of 3.1%, down significantly from its peak of 9.1% in June 2022. While not the 2.0% rate that The Federal Reserve Board (The Fed) has as its target rate, the trend remains positive.
- Wage Growth: From January 2023 to January 2024, real average hourly earnings increased by 1.4% (seasonally adjusted). Interestingly, workers in lower-paid jobs experienced more substantial wage increases during the pandemic than those in higher-paying positions. This trend has contributed to a narrowing of the “college wage premium” and a reduction in income inequality. And despite initial job losses during the pandemic, many individuals transitioned to better-paying roles in different industries, leading to improved wages for lower-income workers.
Factors driving market pessimism:
- Global Uncertainties: Despite recent gains, investors remain cautious due to geopolitical tensions, trade conflicts, and potential disruptions in the global economy.
- Economic Concerns: There continues to be a storyline in some circles in the belief that a hard economic landing will result from the current interest rate environment and an inverted yield curve that has been persistent for more than 17 months.
- Market Volatility & Concentrated Gain: While the S&P 500 performed admirably in 2023 (gaining 25%), some worry that the rally may not be sustainable. The concentration of gains in a few stocks raises questions about the broader market’s stability.
Broader Market Breadth and the Case for the Stock Market
While some analysts express concerns about bloated valuations in the technology sector, we see a different picture. Rather than shrinking leadership from a smaller number of companies, we observe broader market breadth. Put another way, more companies and more areas of the market, are performing well.
This is counter to what you often hear on the various financial news networks. Turn on the TV and you will often hear a discussion about the lack of market breadth and the market indexes being led higher by a small number of companies, mostly large-cap technology companies that you surely have heard of. Doubters have only become louder as the S&P500 has moved to new all-time highs during the first few months of 2024.
After looking at the data and market action, however, we believe this argument is problematic. While many concentrate on what is happening with the S&P 500, it is not “the market.” What it represents is an index of 500 of the largest publicly traded companies, in which each component of the index is weighted relative to its total market capitalization. In a capitalization-weighted index, companies with larger market capitalization exert a greater impact on the index value. That same index can be looked at on an equally weighted basis, where all the components of the index are invested in equal amounts.
Chart #1 looks at the equally weighted S&P 500 Index. What stands out to us are two things. First, while not at record levels, it is very close to the all-time highs set at the end of 2021. The other noticeable trend is the strong performance of the index since the market bottomed in late October 2023. In a market dominated by just a handful of the largest publicly traded companies, we do not believe this would be happening.
Chart #1: www.stockcharts.com Data 09/01/20 – 03/01/24 as of 03/01/24. An index is not managed and not available for direct investment. MA 50 = 50 day moving average MA 200= 200 day moving average. Past performance is not a guarantee of future results.
Digging a little deeper into the markets, small-cap and mid-cap indexes have been rallying since the bottom in late October 2023. In fact, over the past four months, the mid-sized companies (Chart #2) and small companies (Chart #3) indexes have outperformed the S&P 500. We should note, that neither index contains the largest companies.
Chart #2: www.stockcharts.com Data 09/01/20 – 03/01/24 as of 03/01/24. An index is not managed and not available for direct investment. MA 50 = 50 day moving average MA 200= 200 day moving average. Past performance is not a guarantee of future results.
Chart #3: www.stockcharts.com Data 09/01/20 – 03/01/24 as of 03/01/24. An index is not managed and not available for direct investment. MA 50 = 50 day moving average MA 200= 200 day moving average. Past performance is not a guarantee of future results.
Final Thoughts
While mega-cap tech companies have long held sway, other players are now stepping into the spotlight, driving the stock market indexes higher. In our view, for the stock market to continue higher this trend needs to continue. Moreover, we think that a strong enough trend from non-technology-related stocks can overcome underperformance from the mega-cap tech companies. While that is just our opinion, the stock market continues to confirm a bias toward positive returns.
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Sources:
- Warren Buffett used to think that ‘predicting’ the stock market was the most important thing in investing — until 1 book changed his life forever. Here’s the real key to long-term gains (yahoo.com)
- Charts: Why Americans are more confident about the economy (cnbc.com)
- Real Earnings News Release – 2024 M01 Results (bls.gov)
- Lower-income workers see higher wage growth than others – Marketplace
On behalf of Magellan Financial we would like to thank you for taking the time out of your busy day to take in our thoughts and opinions. If you found this helpful, please forward it to others. If you have any questions on the materials presented, would like to be added to our email list, or would like our help with your investments, we can be contacted at 610-437-5650 or via email.
Wells Fargo Advisors Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author(s) and are not necessarily those of Wells Fargo Advisors Financial Network or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request.
Index returns are not fund returns. An index is unmanaged and not available for investment.
Dow Jones Industrial Average: The Dow Jones Industrial Average is a price-weighted index of 30 “blue-chip” industrial U.S. stocks.
S&P 500 Index: The S&P 500 Index consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market value weighted index with each stock’s weight in the Index proportionate to its market value.
S&P Midcap 400 Index: The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market, and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between the S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.
S&P Small-Cap 600 Index: The S&P SmallCap 600 Index consists of 600 domestic stocks chosen for market size, liquidity (bid-asked spread, ownership, share turnover and number of no trade days) and industry group representation. It is a market value-weighted index (stock price times the number of shares outstanding), with each stock’s weight in the index proportionate to its market value.
MSCI World Index: The MSCI World Index is a free float-adjusted market capitalization index that is designed to measure global developed market equity performance.
MSCI EAFE® Index: The MSCI EAFE Index is designed to represent the performance of large and mid-cap securities across 21 developed markets, including countries in Europe, Australasia and the Far East, excluding the U.S. and Canada.
MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets.
The CRB (Commodity Research Bureau) Index measures the overall direction of commodity sectors. The CRB was designed to isolate and reveal the directional movement of prices in overall commodities trades.
Bloomberg Barclays U.S. Aggregate Bond Index: Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based measure of the investment grade, US dollar-denominated, fixed-rate taxable bond market.
U.S. Dollar Index (USDX) measures the value of the U.S. dollar relative to majority of its most significant trading partners. The index is similar to other trade-weighted indexes, which also use the exchange rates from the same major currencies.
Stocks offer long-term growth potential, but may fluctuate more and provide less current income than other investments. An investment in the stock market should be made with an understanding of the risks associated with common stocks, including market fluctuations.
Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility.
Investment products and services are offered through Wells Fargo Advisors Financial Network, LLC (WFAFN), Member SIPC. Magellan Financial, Inc. is a separate entity from WFAFN.
Robert I. Cahill, Partner Rob.Cahill@wfafinet.
Jonathan D. Soden, Managing Partner Jon.Soden@wfafinet.com
Robert Sweeney, Financial Advisor Bob.Sweeney@wfafinet.com
Jay Knight, Senior Account Administrator Jay.Knight@wfafinet.com