February 17, 2024 Market Update

The U.S. stock’s five-week rally ended with a modest loss for the trading week through Friday, February 16th.  The S&P 500 Index fell 0.4%, although earlier in the week the benchmark was nursing a much deeper decline, following the release on Tuesday of the hotter-than-expected consumer inflation data for January.

The bond market continued to lose ground for a second week.  Vanguard Total Bond Market ETF (BND), a proxy for U.S. fixed-income securities, lost 0.5% for the week, closing near its lowest level in over two months.

The consumer price index was up 3.1% in January from a year earlier, down from its 3.4% pace in December, but the rise was more than the 2.9% economists polled by Reuters had been expecting.  Underlying core inflation, which strips out energy and food prices, rose 3.9% from a year earlier, holding steady for a second straight month.

Enduring inflation and strong economic data appear to have finally convinced Mr. Market that the Federal Reserve’s cautious tone on future rate cuts is sincere.  Back in December, traders were betting that the Fed would implement up to seven quarter-point rate cuts in 2024.  Activity in the futures market last week suggested that traders are now expecting that the Fed will implement just four or five such cuts, which is only slightly more than the Fed outlined earlier this year.  

Wall Street economists and other forecasters have been vocal about their concerns that the Fed is being overly conservative when it comes to normalizing interest rates.  But with America currently enjoying a robust economy, a strong labor market and falling inflation, at present the approach America’s central bankers are taking seems pretty much spot on.

That said, there are reasons for concern.  GDP growth remains on track to soften in the first quarter of 2024.  Wage growth has been on a downward trend since last March.  Consumer spending on both discretionary and non-discretionary items appears to be slowing.  Credit card and auto loan delinquencies have risen above pre-pandemic levels.  And average mortgage rates are still near 7 percent; close to a two-decade high.

So, the potential for a policy blunder by the Federal Reserve is still a serious risk to the economy and the markets.  Then again, there are always threats lying beneath the surface, which is one of the reasons diversification continues to be a key part of our investment approach.

That’s all for now.  Have a great weekend and invest wisely my friends.