Category: CIO Insights

January 7, 2025

Santa Rally Fails To Materialize But Stocks Log Epic Year

Stocks ended 2024 with a whimper, as the S&P500 lost -2.4% in December to close at 5,882. The fabled “Santa Claus rally,” which generally sees the market post strong gains in the final days of the year, was not meant to be this time as a combination of profit-taking and rebalancing resulted in December losses. Nonetheless, the fourth quarter and calendar year were strongly positive, with the benchmark index gaining 25% in 2024 and registering 57 new all-time highs. This strength comes on the back of a solid 2023, and the market’s two-year performance is the best in nearly 25 years. Despite Santa’s conspicuous December absence, equity investors were indeed on the good list this year and were rewarded accordingly.

Looking under the hood, 2024 was a story of large-cap domination, with mega-cap names outperforming the broader S&P500 by more than 8%. The “Magnificent Seven” stocks turned in another blockbuster year, gaining 67% in 2024 and representing 55% over the overall market return! This dynamic has been consistent over the last several years and reminds us that concentration risk in the broad indices remains a key consideration for asset allocators. Small- and mid-cap stocks performed well on an absolute basis, registering double-digit gains but lagging far behind their large-cap brethren. “The bigger the better” as they say.

The Federal Reserve cut its benchmark interest rate by a quarter point in December, just as expected. This reduction came despite increased inflation expectations, with year-end estimates for 2024, 2025, and 2026 all being revised higher. Arguably more important than the cut itself, the bank’s messaging implied fewer cuts in 2025, which has landed squarely front of mind for many investors and market participants. Immediately following the announcement, bond yields rose – especially in the 2–3-year maturity range – which reflect the market’s expectation of a “Fed pause.” The bond market, commonly referred to as the “smart money,” is clearly telling us that it has concerns over the Fed’s ability to push inflation lower from here. Accordingly, the month of December and the entire fourth quarter were challenging for bonds, as rising yields forced prices down resulting in modest losses across the major indices. The Bloomberg US Aggregate index fell -1.64% during the month, but still managed to close 2024 in the green with a meager 1.25% total return.

Alternative investments – namely gold and cryptocurrency – were in the headlines all year long. The former, although slightly down in December, was the bright and shiny star amongst alternatives in 2024, turning in a +27% year and outperforming the S&P500. This was the precious metal’s best year since 2010, and was fueled mainly by incessant central bank purchasing, easing monetary policy and geopolitical strife. This strong performance for gold was achieved in spite of traditional headwinds in the strong US dollar and rising bond yields.

Bitcoin also attracted major attention during the year, as the launch of several ETFs catapulted the digital asset into the mainstream. One particular bitcoin ETF has seen its assets under management grow to $50B in less than a year, making it arguably one of the most successful new product launches ever. BTC’s price rose 100% in 2024, driven by the above ETF adoption (and associated inflows), general risk-on positioning, and pro-crypto sentiment on the part of the incoming administration. Rumors of President Elect Trump using bitcoin as a reserve asset on “day one” of the administration have only added fuel to the fire.

Looking forward, investors are relying on robust corporate earnings as the primary means for the bull market to continue. Earnings are forecasted to grow 2.1% in 2025, which should provide support for equities at current or slightly higher valuations. But we must always be prepared for the unknown, which is everywhere around us as we enter the new year. Of particular note are the effects of the incoming administration’s policies on international trade, immigration, deregulation, and taxes (among others). As ever, we will do our best to be prepared for a wide range of outcomes, and position portfolios accordingly. While we cannot predict what 2025 will bring, we can and will stick to the knitting which has served us so well in the past: a well-reasoned, disciplined process that is adhered to across all market environments.

We are excited to embark on another year with our valued friends, family, and clients. We hope it is fruitful and prosperous for all. Until next month, we wish you a happy new year and thank you for your ongoing trust and support.

Sincerely,

Jason D. Edinger

Chief Investment Officer

Boston Wealth Strategies

December 6, 2024

Black Friday concluded the final day of November trading, and the holiday-shortened session put an exclamation point on a
tremendous month for equities. Following a quick and conclusive election – which saw Republicans advance in almost all categories
– markets staged a relief rally to close the month at new all-time highs. The S&P500 rose 5.9% during November, posting its best
month of the year. In a change of trend, small-capitalization stocks also participated, with the Russell 2000 gaining 11% (!) to deliver
its best month in nearly a year. This stellar performance in the wake of November 5th should come as no surprise; the market tends
to rise post-election as uncertainty has been eliminated. As the chart below clearly shows, the more that time passes after the big
day, the smoother the ride becomes for stocks (and bonds).

Source: “Elections, The Fed, and Uncertainty: Navigating the Fixed Income Market”; Weitz Investment Management

Election results were clearly the primary driver of November performance, as the market quickly priced in expectations for further
tax cuts, additional fiscal support, and government deregulation. Presumably, all the above are positive for economic growth and by
extension, future market performance. On the tax front, it is all but assured that the 2017 Tax Cuts & Jobs Act will be extended.
Additionally, President Elect Trump has proposed even further corporate tax cuts (from 21% to 15%), which could maintain margins
and boost S&P500 earnings by 4-5%. While Trump’s cabinet selections have received mixed reviews, the market cheered on the
nomination of Scott Bessent to Secretary of the Treasury, noting the former hedge fund manager’s reasonable and pro-growth
stance. All told, the markets received an undeniable boost from the election and while the devil remains in the details, the initial and
ensuing reaction has been highly positive.

The other major development in November was the further normalization of monetary policy on the part of the Federal Reserve.
The central bank cut interest rates by a further 0.25% which brought the target to a range of 4.5-4.75%. Given the backdrop of
strong economic growth and a sturdy labor market, this was entirely expected and well-received by the market. Fed Chair Powell
indicated that the trends of a good economy, cooling inflation, and normalizing labor market looked poised to continue. Notably, he
also reiterated that the committee remains “data dependent,” and that future rate decisions would be made from meeting to
meeting. Accordingly, the yield on the 10-year Treasury fell from 4.39% to 4.19%.

Economic data came in mostly strong, delivering even more market optimism. Q3 GDP data was unchanged from its initial estimate
and showed growth clocking in at a 2.8% rate. Personal incomes and spending also ticked up marginally, reinforcing the notion that
the American consumer remains on solid footing. Inflation readings were slightly mixed, with both the CPI and PCE Index (the Fed’s
preferred measure) in line with expectations. Jobs data were also mixed but consistent with a strong, although slowing, labor market
(October data included one-time effects of hurricanes and a strike at Boeing). All told, there was nothing in the monthly data to
spook markets or knock them off their upward course. Good news for bulls.

Looking forward, the next key piece of data will be the November jobs report, which will give the Fed insight into labor market
trends. We also have the usual inflation metrics, which will be weighed heavily during the next Fed meeting, taking place December
17-18. Finally, market participants are already looking through to the next quarterly earnings season, where expectations are high.
Many analysts are expecting the strongest quarterly growth in three years. All these pieces will collectively determine the market’s
next move and will serve to set the stage for 2025 direction.

This will be our last writing of 2024. It has been a pleasure to share our thoughts and insights during a magnificent and truly stellar
year. As the sun sets on 2024, we wish all of you the happiest of holidays and continued prosperity during the new year. As ever, we
thank you for your ongoing trust and support.

Sincerely,
Jason D. Edinger
Chief Investment Officer
Boston Wealth Strategies

November 7, 2024

October ended with a downturn for the major indices, which were spooked by mixed corporate earnings, increasing bond yields, and the looming presidential election. The S&P500 gave back modest ground during the month, losing -0.92% during the period to close at 5,705. Small capitalization stocks fared even worse, losing -2.6% while correlating strongly with higher interest rates. As economic data continue to come in strong, rates have risen accordingly, and small caps have struggled. October concluded with sharp losses and pounded nails in the winning streak coffins: it was the first negative month since July for the NASDAQ and both the Dow and S&P500 had five-month positive streaks snapped. Boo-hoo.

Volatility increased markedly during October, as investors jockeyed to position portfolios ahead of the presidential election. Rates and bond markets showed the highest relative volatility, as yields have surged on the back of inflationary campaign rhetoric and decreased expectations for future rate cuts. During the month, yields across the curve backed up around 0.5% depending on the precise maturity. This put pressure on bond prices and resulted in losses across all the major bond indices. During the 1.5 months since the Fed began the easing cycle, economic data have continued to come in strong and cast doubts over how many cuts that the market has priced in. Stuck between a rock and a hard place, Chair Powell has his work cut out for him if he is to deliver on both amount and size of market expectations.

Powerful headwinds to lower future interest rates have come in the form of ongoing economic strength, minor but sticky inflation, and a sustained low unemployment rate. None of the October data contradicted these points:

• October payrolls were weak (+12K jobs created) but resulted in no change to the unemployment rate
• September inflation came in slightly hotter than anticipated (0.2% monthly versus 0.1% expected)
• Headline GDP came in slightly weaker (2.8%) but personal consumption, which accounts for 2/3 of the economy, came in at a strong +3.7%

In keeping with the above, the Federal Open Market Committee is widely expected to reduce its target Federal Funds Rate when it meets November 7^th, most likely by 0.25%. Nevertheless, investors have clearly recalibrated their thinking relative to how aggressive the central bank will be in cutting rates over the next cycle. Accordingly, we expect volatility to remain elevated in the near term.

Gold and other precious metals continue to grab headlines as their blistering rallies continue. Physical gold rose +4.2% during the month and hit multiple all-time highs after storming nearly 6% higher in September. While we have seen furious demand on the part of global governments and central banks, recently we have seen a safe-haven trend emerge ahead of the election, which still appears too close to call. Gold is up an incredible 33% this year, arguably sparking even more demand and resulting in an upward, virtuous cycle. Moving forward, potential tailwinds for gold and metals include global monetary easing, sticky inflation, increased fiscal imbalances (deficits), associated dollar debasement, and geopolitical conflict. Not to mention the ever-present FOMO!

As of this writing, we are less than 24 hours until Election Day. Naturally, there is a lot of political noise dominating the landscape. While we would not be surprised to see heightened volatility in the immediate aftermath of the election,  we do recognize that markets tend to look through elections to quickly and efficiently price in any major policy implications. And the further we travel away from the big day, the smoother the ride tends to be for both stocks and bonds. We rest assured knowing that time is the great equalizer.

Outside of the election, the economic data continue to point to a soft landing with no recession. The Fed is telegraphing that it intends to continue its loosening policy, outside of major dislocations in terms of employment and/or inflation. It is widely expected that the bank will cut interest rates a further 0.25% while awaiting crucial economic data before the final December meeting. From a seasonal perspective, November has been the best month for stocks over the last decade and has posted an average return of 3.81%. Not shabby. Either way, November 2024 will likely be an epic month in many regards, and we stand watchful with our investment processes firmly in place.

We wish you a very early Happy Thanksgiving and as ever, we thank you for your ongoing trust and support.

Sincerely,

Jason D. Edinger

Chief Investment Officer

Boston Wealth Strategies

October 4, 2024

Financial markets defied typical September weakness – often the worst-performing period of the year – to conclude a winning month and quarter. The S&P500 closed at a record level, gaining 2.1% to post its first positive September in five years. The bellwether index has now risen a fourth consecutive quarter and has delivered the best start to a year (22%) since 1997. Although markets endured a rough start to the historically weak month, investors were able to climb the wall of worry and push the indices higher, mostly on the back of an interest rate cut domestically and massive Chinese stimulus internationally.

All eyes were on the Federal Reserve, and the bank did not disappoint. The committee cut short-term interest rates by an outsized 0.5%, dialing back restrictive monetary policy as it sees inflation clearly within the crosshairs of its 2% target. Additionally, the Fed noted minor weakness in the labor market, with the unemployment rate slowly rising over the past 12 months. Accordingly, Chair Powell declared that “the balance of risks” between inflation and employment “are now even,” and thus began what appears to be the slow recalibration of monetary policy to something more “normal.” The market anticipates at least another 0.25-0.5% of cuts this year, with the next Committee meeting scheduled for November 18th.

Overseas, China took center stage as the government threw about any measure of stimulus possible against the wall. Responding to economic indicators that remain bleak, China announced a broad range of aggressive stimulus measures designed to inject liquidity into the economy and raise the country’s real GDP output. The Chinese stock market reacted instantly, ripping higher with the Shenzen 300 Index rallying 25% over the next several trading days. To end the quarter, mainland Chinese stocks turned in their best day in 16 years (up 8%) and capped a nine-day winning streak after key economic data came in better than expected. While the effects of this stimulus will take time to fully work their way through the system, the short-term reaction has been to ignite momentum overseas and contribute to the risk-on posture in global equity markets. What they threw seems to have stuck. For now.

Strength in precious metals also made headlines during the month. Physical gold prices stormed 6% higher in September, notching multiple record highs and posting the best quarter for the “barbarous relic” in more than eight years. After numerous daily record highs, bullion ended the month at $2,668 per ounce and continues to lead commodities this year. This is unsurprising, as gold and other metals tend to benefit in response to declines in interest rates (see paragraph 2) and inflationary conditions (see paragraph 3). Investor concerns over escalating geopolitical tension, notably in the volatile Middle East region, also helped the safe haven commodity’s surge higher. Silver, not to be outdone, delivered an even more impressive rally, gaining 9.5% on the month.

Looking forward and given the blistering performance in recent months, we would not be surprised to see some price consolidation as the market catches its breath after so much sprinting. Given the year-to-date gain in the broad markets, the S&P500 is now somewhat richly valued and is trading around 21.5x forward earnings. There is the possibility that prices could retrench in the fourth quarter, particularly when considering tense relations among the major Middle East players and an uncertain picture around the US presidential election, now just barely one month down the road. Lastly, in a major development which has received little coverage in the mainstream press, dockworkers in major US port have begun to strike, which was unforeseen until recently and which could have lasting negative economic implications if that situation were to drag on or become worse.

Nevertheless, the more intermediate-term picture is characterized by cheap energy, policy stimulus at home and abroad, and corporate earnings which are projected to grow modestly. This all feels positive for global markets, but we may be forced to contend with short-term volatility as some of the more dubious factors sort themselves out in the coming weeks.

We wish you a great first full month of fall, and as ever, we thank you for your ongoing trust and support.

Sincerely,

Jason D. Edinger

Chief Investment Officer

Boston Wealth Strategies

September 13, 2024

After hitting all-time highs in July, cracks began to appear during the month of August. The unofficial last summer month began with a ferocious sell-off, resulting in the S&P500 dropping 6% during the first three days alone and the Magnificent 7 falling almost 10% during the same period. It was the worst start to a month in over 20 years and was owed largely to growth concerns after the July payrolls report came in much lighter than expected. Other key pieces of data suggested that the economy is softening, and the Federal Reserve has kept interest rates too high for too long. Contagion in Japan related to its currency and interest rate contributed to the sour mood and elevated volatility, with the VIX spiking to its third-highest level ever seen. Not a fun start. 

Yet in just 11 trading days following that steep decline, the market fully recovered and ascended toward the record July peaks. This rally was based on stronger-than-expected economic data combined with the near-guarantee of interest rate cuts in the coming months. Throughout August, the Federal Reserve signaled that it would likely cut interest rates in September – with recession risks low and core inflation in line with expectations. During his highly anticipated speech in Jackson Hole, Fed Chair Powell confirmed that he was confidant in the directionality of inflation data and would shift the emphasis to supporting the labor market and therefore “adjusting” monetary policy. Essentially, he said that inflation has been tamed and it is time to start reducing market interest rates. Both stock and bond markets rallied aggressively as a result.

Chair Powell is not wrong. The US economy indeed remains modestly strong. While unemployment did tick up in July, it is still low by historical standards and when combined with decent GDP growth and moderating inflation, it does appear that the economy is primed for the coveted soft-landing scenario. The above economic data, combined with the widespread view that monetary policy is far too restrictive, suggest that the Federal Open Market Committee will reduce its benchmark rate by 0.25% in September, followed by a further 0.25-0.5% by year-end. Given the political elements involving the November election, it is unlikely that Chair Powell or the committee will deliver any surprises here. We believe the committee will stick to the script whilst simultaneously remaining data dependent. Rate cuts, here we come!

Looking forward, we are heading into a seasonally challenging time, with September being the most volatile month of the year historically. Over the last five years, the S&P500 has delivered a negative average return of -4.2% during month number nine. Perhaps this time is different with an interest rate cut due on the 18th. Certainly, the market is saying as much, with the odds of a September cut approaching 100% in betting markets. The question becomes: will it be a 0.25% or a 0.5% reduction? The possibility of a 50bps cut remains on the table if certain key economic reports, namely jobless claims and nonfarm payrolls, do not meet expectations. We also must contend with “triple witching” on the 20th (derivative expirations on options, index futures, etc.) as well as the November election, which has begun to loom large.

Given the above combined with a seasonally weak time period, we would not be surprised to see additional volatility in both stock and bond markets. That being said, we are positioned for whatever the market will throw at us, and we stand ready to react accordingly. As ever, we thank you for your ongoing trust and support.

August 20, 2024

Like Independence Day fireworks, equity markets popped off in July, with the S&P500 notching its 10^th consecutive monthly gain and tagging its 38^th all-time high during the month. Impressive. Beneath the hood however, the price action was choppy and rotational, with investor interest shifting from the crowded mega-cap tech space to smaller companies. The stars of July were undoubtedly small-caps, with the Russell 2000 surging 10.2% during the month on the back of softer inflation data and the near certainty of a rate cut. The epic rotation from large to small was historic and narrowed the gap between large- and small-cap performance this tear to just a few points. It remains to be seen whether or not July marked the start of a regime change, but market action during the month did underscore that diversification within asset classes is just as important as diversification between asset classes.

On the bond side of the ledger, we have seen yields trending down for several months now, and that continued in July. Weighed down by softening economic data and market expectations of a September interest rate cut, yields fell broadly in July and fixed income performance was uniformly positive, with the Bloomberg US Aggregate Index gaining 2.34% during the month. Of course, all eyes were on the Fed which concluded its two-day meeting on the last day of the month. The central bank held its benchmark rate steady in the 5.25-5.5% range, but held the door wide open for a cut during the September meeting. The market is currently pricing in a 100% probability of a September cut, signaling to the bank that the deal is effectively done. Given Fed history of doing exactly what the market expects, it is highly likely that September will see the first interest rate cut since the COVID-19 time period.

In terms of economic data, the June nonfarm payrolls report beat on the headline number, but more importantly it showed that both April and May numbers were revised lower. Accordingly the unemployment rate ticked higher as we are beginning to see signs of a cooling labor market. This should provide cover for the Fed to move forward with its interest rate cutting campaign. On the inflation front, the headline reading for June fell -0.1% to an annualized of only 3% increases. While this is indeed positive, it does show the challenges facing the Fed and its inability to reel inflation in to the bank’s stated goal of 2%. It is looking like we will all need to become comfortable with an annual inflation number north of 2%, as additional progress to lower prices appears to have stalled out.

Looking ahead, the month of August will be led by Fedspeak and corporate earnings, which thus far have been mixed. The standard slate of economic releases will give us clues on inflation, employment, and also personal consumption. In the back half of the month, the annual Jackson Hole Economic Symposium take place, which should generate some headlines. In the interim, the markets have a lot to digest, and we would not be surprised to see volatility return during the last full month of summer.

We thank each and every one of you for your ongoing trust and support.

 

July 7, 2024

Posted by Jason Edinger on Tue, 07/02/2024 – 11:22

First Half Highlights

Tempus fugit. An apt Latin reminder that time is fleeting. With the first half of 2024 already in the books, the year is flying by, and equity investors have been rewarded thus far with solid gains. All but one of the major indices (microcaps) were in the black for 1H, with the NASDAQ and S&P500 leading the way, lagged by the Dow and Russell 2000.

Year-to-date, size has mattered as large- and mega-cap stocks have decidedly outperformed their smaller brethren. Given massive weightings in their respective indices, the outperformance of large vs. small this year is mostly attributed to the robust gains of several mega-cap stocks, notably Microsoft, Nvidia, et al. The 2024 reality: it is all about tech and large-cap. Nevertheless, stocks overall have edged higher this year, turning in a great first half and extending the rally that began in October of 2022*.

The first half of 2024 was more challenging for the bond side of the ledger. Interest rates rose over the period, with the 10-year Treasury yield climbing from 3.9% in January to 4.6% by the end of May. This rising interest rate environment, which asserted itself across the entire yield curve, weighed on bond prices, keeping returns muted across most fixed income sectors. After a challenging 1H, current rate levels have set the stage for a better second half. Fixed income valuations look favorable across several sectors, with various investment-grade yields at or near their highest levels in a decade. Spreads remain tighter than historical averages, but the higher absolute yields should be supportive of more appealing fixed-income returns on a go-forward basis.

We would be remiss to discuss the bond environment without spending a few words on the Federal Reserve and inflation. The latter has proven to be stubbornly sticky this year, putting upward pressure on interest rates and, by extension, the Fed. Owing largely to better-than-expected economic data, the markets have hawkishly repriced their expectations on the interest rate front, with only one or two cuts remaining possible this year. Nevertheless, the overall trend is toward disinflation and softening economic data, which should give the central bank enough cover to either a) signal even more accommodative future monetary policy or b) simply begin cutting interest rates altogether. If either of these scenarios play out, it could spark a rally for bonds to close out the year.

Looking Ahead: Glass Half Risky?

Inflation remains front of mind for investors and economists. Although inflation continues to move in the right direction, the risk of a re-acceleration is very real, and any upward surprise in the data could cause serious disruptions in both stock and bond markets.

Investors don’t seem to care much about the narrow market breadth we are currently seeing. As mentioned above, the market rally has been driven primarily by just a handful of stocks (only 60% of S&P500 constituents are positive this year), which can be interpreted as a sign that the broad indices are poised for a correction deeper than any we have seen this year. There is the chance that mega-cap stocks have run too far too fast, and the markets spent the better part of June consolidating after one of the most bullish 5-month periods on record. They may have trouble getting re-energized for the remainder of the year.

Finally, markets do not seem worried about war or politics. The ongoing war in Ukraine, continued conflicts in the Middle East, and China’s economic slowdown all have potential to cause further regional and global uncertainty that could spill over to the broader world economy in the second half of the year.  In addition, we face considerable political instability due to the U.S. elections in November. We’re likely to see this uncertainty ramp up as the political convention season kicks off this summer and we get closer to election day.

Glass 6/10ths Full

The good news is that our economy and capital markets are incredibly dynamic and resilient. We expect economic growth, while moderating somewhat, to remain broadly positive and should help the fight against inflation. Stock fundamentals are in solid shape, and total return prospects for bonds are looking as good now as they have in a very long time. Finally, we have a Federal Reserve who has made it crystal clear that its next move is a rate cut. That recipe – slowing inflation, decent growth and lower interest rates – should favor the optimists. While there are risks, we remain overall bullish on the markets as we kick off the year’s back half.

As ever, we thank you for your continued trust and support.

* chart source: NASDAQ

All indices are unmanaged, and investors cannot actually invest directly into an index. Unlike investments, indices do not incur management fees, charges, or expenses. Past performance does not guarantee future results.

June 11, 2024

Posted by Jason Edinger on Sunday, March 3, 2024

The rally rolls on. Hard. Statistically, February is a challenging month, but this go ‘round the bulls defied the odds to end squarely in the green (and in record territory). The Dow, S&P500, and NASDAQ all made fresh all-time highs, while small caps (Russell 2000) made a new 52-week high. The Magnificent 7 stocks were mixed, as several of the darling tech companies failed to achieve new highs with the market and show signs of topping out. All S&P sectors were higher on the month, led by consumer discretionary, industrials and, of course, technology. All told, February did not suffer its usual sluggishness and as a result, 2024 is off to a very solid start.

The biggest story of the month was Nvidia, the poster child for both the tech sector and, more importantly, artificial intelligence. In its most recent quarterly update, Nvidia reported mind-boggling numbers, including a 265% increase in annual revenue. CEO Jensen Huang guided to even stronger projections for 2025 and 2026, also declaring that artificial intelligence had “hit a tipping point” with surging demand “across companies, industries, and nations.” Accordingly, Nvidia was rewarded with a $277B increase in market cap that day, an historical record for any US-listed company. The stock was up 28% on the month and helped fuel the broader rally across the major indices. Investors remain spellbound by the potential of artificial intelligence, and no company has done more to capture their collective imagination than Nvidia.

The other big story in February was the hawkish shift in rate cut expectations from March to June. The messaging out of the Federal Reserve has remained remarkably consistent in recent months. The central bank remains “data dependent” and wants to see more evidence of inflation cooling before it cuts rates. It also signaled that it would begin discussions of quantitative easing at its next meeting, effectively taking a March rate cut off the table. As such, Fed fund futures are now pricing in a 67% chance of a cut in June and just three 25bp cuts this year (see chart courtesy of CME Group).

From an economic standpoint, the data continue to come in mixed. January was the third consecutive month where the unemployment rate did not budge from its 3.7% mark, and the 24^th consecutive month below 4%. The employment number was much stronger than expected, with job creation clocking in at 353K vs. 185K expected. This was the highest level of job creation in over a year. By contrast, inflationary data were less rosy, as the year-over-year headline number came in above expectations at 3.1%. As has been the case in recent months, shelter and food at home were the biggest drivers of price increases. This report, while showing year-over-year easing in inflationary pressures, was still hot enough for the Fed to maintain its hawkish timeline as to when rate cuts will begin.

A few words must be said about cryptocurrency and bitcoin. The world’s most valuable cryptocurrency ended February with an astronomical gain of 43%, its best monthly achievement in over three years. The rally was supported by the SEC’s January approval of 11 new spot bitcoin ETFs, which have garnered substantial inflows (tens of billions) and have sparked renewed enthusiasm (and speculation) in cryptocurrency. Bitcoin is now up seven months in a row, and the wave of optimism has spilled over into crypto-centric companies such as Microstrategy and Coinbase. Resembling what we are seeing in the artificial intelligence space, it is obvious that speculation is back in the cryptocurrency markets.

Looking ahead, we have Fed Chair Powell testifying in Washington on March 6^th and 7^th. His comments will likely impact how bond and equity investors position themselves for the near and intermediate terms. In terms of economic releases, we have the usual slate of nonfarm payrolls (8^th), inflation (12^th) and FOMC rate decision (20^th).

As ever, we thank you for your continued trust and confidence. Please reach out with any questions or concerns.

*This article is intended strictly for educational purposes and is not a recommendation for or against cryptocurrency.

Posted by Jason Edinger on Friday, May 3, 2024

Indisputably, the weather affects mood, and the mood amongst investors in April was gloomy and downbeat. Equities endured a tough start of quarter, with the S&P500 posting both its first monthly decline of 2024 and its first 5% pullback in 6 months. 10 of the 11 GICS sectors were in negative territory, with only utilities ending in the black. Fixed income markets also struggled, as treasury yields increased across the curve with the bellwether 10Y yield hovering at 6-month highs and poised to challenge the key 5% level. This weakness was the dual result of sticky inflation and a higher-for-longer narrative, which served to rain on rate cut expectations and put pressure on capital markets.

During the month, we saw a significant shift in market expectations regarding the probability and magnitude of interest rate cuts. Over the last several quarters, the market was confident that we would see at least 3-4 cuts this year, with interest rate futures pricing in as many as 6-7 back in January. Expectations have quickly changed, with the market now predicting just a single 0.25% cut this year, if any at all! This hawkish sentiment was fortified by nearly all Fed committee members, who affirmed that persistent inflation data have not provided the confidence needed to embark on an easing cycle. Accordingly, yields on treasury bonds rose sharply, with maturities from 2-30 years all increasing by at least 0.45% during the month. Dark and difficult times for bond investors, indeed.

Economic data took center stage in April, as both inflation and overall economic performance were key barometers. The pace of headline inflation surprised to the upside at +3.5% year-over-year, with notable price increases in sectors like shelter and services. US inflation has levelled out in the 3-4% range for the last nine months, calling into questions whether the Fed can really get price increases down to that critical 2% level. Despite strong payrolls and retail sales, Q1 GDP figures in April surprised to the downside, signaling lower growth in the economy. This combination – stubborn inflation and weaker economic growth – gave birth to a new narrative of the dreaded term “stagflation” which is commonly defined as a period of high prices and anemic growth.

Despite the morose and overcast environment, there were some glimmers of sunshine as we closed out the month. Earnings season has generally delivered the goods, exceeding expectations with higher-than-expected growth rates. Mega cap tech stocks, to include several of the darling “Magnificent 7,” reported robust earnings, underscoring that secular growth and the artificial intelligence themes are both alive and well. The economy continues to show resiliency and strength, particularly in the labor market with the unemployment and labor force participation rates trending in a positive direction.

Finally, we note that commodities were the only major asset class to enjoy gains in April. Lately we have written here about the strong performance of gold and other commodities, and that trend continued in spite of the market challenges mentioned above. Notable strength was seen in the industrial and precious metals sub-sectors, as strong demand supported prices. Gold tagged a new all-time high and continues to break out even further. All told, gold and the broader commodity complex bear watching as there is a “glass half full” attitude towards the asset class as the skies grow greyer and darker for traditional stocks and bonds. Perhaps the dawn is breaking on a new bull run for commodities.

We hope you have a wonderful month. May the skies clear and part for sunshine. The market’s mood – and our own – could use some light right about now. If we are lucky, by the next writing spring will have finally sprung. In the meantime, please reach out with any questions, and thanks as ever for your continued trust and support.

All indices are unmanaged, and investors cannot actually invest directly into an index. Unlike investments, indices do not incur management fees, charges, or expenses. Past performance does not guarantee future results.

Posted by Jason Edinger on Tuesday, June 4, 2024

May was a solid month for equity markets, rebounding from a weak April to close in the black for the fourth month out of five this year. All the major benchmark indices closed the month higher than they began it, and the S&P500, Dow Jones, and NASDAQ all clipped new all-time highs. 10 of the 11 GICS sectors were positive, with only energy declining, owing mostly to falling oil prices. The tech-heavy NASDAQ lead the way with a 7% total return, while the old-school Dow lagged, delivering 2.6% of positive performance during the month. Overall, stocks reversed the prior month’s losses and move into June boasting an 80% monthly batting average so far in 2024. Not bad in my mind’s eye.

As has been the case in recent history, technology played the starlight role in May, turning in a 10% month to bring its year-to-date performance up to 17.3%. The sector owes much of its power to semiconductors, most notably the darling AI chipmaker Nvidia. The mega-cap tech giant delivered impressive quarterly results yet again, with both top-line revenue and bottom-line profit blowing even the most ambitious estimates out of the water. The company also guided towards even higher revenue and profit projections in the coming quarters. Accordingly, NVDA broke out to fresh record highs and was the single greatest contributor to S&P500 performance during the month. The mantra holds true:  as goes tech, so goes the market.

If fundamentals drive market performance, as is often alleged, then investors have reason to remain optimistic. Q1 corporate earnings for S&P500 companies were solid, with 78% of companies beating earnings-per-share estimates. FactSet reports that the blended EPS growth rate for all members was 5.9%, far exceeding the 3.4% estimate. Communication services alone delivered an earnings growth rate of 34%. Some caution is warranted, however. Both revenue beats and EPS surprises were below long-term averages, and if one strips out the Magnificent 7 stocks, the blended growth rate for the S&P is -1.8%. Market breadth issues remain a concern, although tech and AI momentum continue to paper over the problem, at least for now.

In terms of economic releases, inflationary data were front of mind. Encouragingly, both CPI and PCE (two related but different measures of inflation) showed prices stabilizing in April, with each statistic rising just 0.3% monthly. The market quickly responded to the inflationary downtick, reigniting hopes for interest rate cuts later this year and kicking the “higher for longer” can down the road for at least one more month. While this bucking of the trend is undoubtedly a welcome development, overall inflation remains well above the Federal Reserve’s long-term 2% target rate, and during the month Jerome Powell himself suggested that the disinflation narrative would need more time to play out before the central bank can begin cutting rates.

Nonetheless, treasuries were mostly higher during the month, as a modest decline in yields resulting from the hope of disinflation contributed on the bond side as well. The bellwether 10YR treasury yield dropped during May, hovering around that critical 4.5% level from which it has not strayed much in the past 60 days. The treasury market remains in a holding pattern, awaiting the possibility of future interest rate cuts while digesting the ever-important inflation, jobs, and GDP data as they come. To note: the 10/2-year maturity curve remains inverted, as it has been for nearly 2 years now. Classically, this would be a leading indicator of a recession on the horizon, but we see no such signs as of this writing.

That seems like a fitting way to wrap up this month’s remarks. Memorial Day has come and gone, and as we near the midway point of the year, we wish each and all of you a happy early summer. Last month we found ourselves wishing for bright and sunny skies, and there is no doubt that May delivered both in spades. Let us hope this keeps up, in terms of both the weather and the markets. As ever, we thank you for your continued trust and support.