Economic Update 3-11-2024

• Economic data during the week included the ISM services falling back a bit but remained in expansion. The employment situation report was mixed, with decent February growth offset by prior month revisions.
• Equities fell back in the U.S., saw decent performance abroad. Bonds gained as yields fell across the curve. Commodities were mixed, with a drop in energy and a rise in metals.

U.S. stock sentiment was seemingly again driven by the back-and-forth of whether Federal Reserve rate cuts would be coming sooner rather than later. Fed Chair Powell’s testimony to Congress last week included that the short-term rate was ‘likely at its peak for this tightening cycle,’ with dialing back policy restraint this year, while also noting the risks of reducing interest rates too soon, as evidence showed the economy is growing, not moving towards recession. At the same time, greater confidence is still needed that inflation has been beaten, although they’re ‘not far’ from that place. This was taken by markets as another sign of around June as the starting point for policy easing, based on action seen in Fed funds futures markets.

President Biden’s State of the Union speech Thurs. evening noted several initiatives, and higher taxes, but did not appear to move the needle too much from a financial market sentiment standpoint. Expiring 2017 tax cuts are already partially implied as a base case, yet Congressional approval in both houses would be required for anything additional in coming years.

By sector, utilities saw the strongest gains of 3%, followed by materials and energy; on the downside, consumer discretionary stocks fell by over -2%, with declines of a percent in technology as well. Weakness in Tesla drove the former, and Apple the latter, with both apparently somewhat in response to slowing sales in China.

In a back corner of the financial sector, New York Community Bank experienced another bout of downside volatility, with concerns over specific commercial real estate exposure. This brought back reminders of general bank stress a year ago, albeit from losses in treasury bond holdings that threatened solvency in several cases, until the potential crisis was averted.

After much wrangling and some paring back, the SEC has also adopted new rules requiring many publicly traded firms to report on climate-based risks in financial statements. This initiative has been controversial to say the least, with the scope broken out into two parts: direct climate impact from company operations, and secondly, from a company’s energy usage. It is unclear from the outset what type of additional compliance burden this will impose on companies (as with Dodd-Frank in 2010, the burden from which ended up being quite heavy on firms in the financial sector).

Foreign stocks outpaced U.S. on the week, with gains of over a percent in all developed regions. In Europe, the ECB kept policy rates unchanged, but hinted at ‘good progress’ being made on reaching their inflation target perhaps up to a year earlier than expected (2025). As with the U.S., this pointed to mid-year as a possible jumping-off point for cuts, although some economists now see Europe potentially leading the way (contrary to normal) due to weaker economic conditions. Emerging market stocks were mixed, with gains on net, although lower than in the developed world. The Chinese National People’s Congress met last week, setting their economic growth target to 5%. Due to weakness as of late, some investors took this as a subtle message that more stimulus is on the way—which has provided a positive influence on stocks.

Bonds saw gains with interest rates declining along with Chair Powell’s comments to Congress, with similar returns for U.S. Treasuries and investment-grade corporates. Both outperformed high yield and floating rate loans as spreads widened. Foreign bonds fared positively along with a sharp drop of about a percent in the U.S. dollar.

Commodities were mixed for the week, as declines in energy were offset by gains in metals, especially precious metals, as hopes of lower rates buoyed prices. Crude oil fell nearly -3% last week to $78/barrel, despite an extension of OPEC+ production cuts, intended to keep prices stable/higher. Since the Russian invasion of Ukraine and a brief spike in early 2022, oil prices have traded in a relatively tight range of $70-90 over most of the past two years, with offsetting supply and demand influences.

Period ending 3/8/2024	1 Week %	YTD %
DJIA	-0.85	3.21
S&P 500	-0.23	7.73
NASDAQ	-1.15	7.31
Russell 2000	0.34	2.97
MSCI-EAFE	2.47	5.78
MSCI-EM	1.24	1.51
Bloomberg U.S. Aggregate	0.81	-0.50

U.S. Treasury Yields	3 Mo.	2 Yr.	5 Yr.	10 Yr.	30 Yr.
12/31/2023	5.40	4.23	3.84	3.88	4.03
3/1/2024	5.42	4.54	4.17	4.19	4.33
3/8/2024	5.46	4.48	4.06	4.09	4.26

Sources:  LSA Portfolio Analytics, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger’s, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder’s, Standard & Poor’s, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research.  Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends.  Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.                                                                                    

The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness.  All information and opinions expressed are subject to change without notice.  Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product.