February 2024 Market Commentary

Market Recap

The stock market had another great month in January as it responded positively to favorable economic data. The S&P 500 gained nearly 2% and is now up almost 21% over the past 12 months. The Bloomberg U.S. Aggregate Bond Index was down 0.3% for the month, while the 10-year Treasury yield was roughly flat, starting and ending the month at 3.86%, despite peaking at 4.18% on January 23. Yields on the 2-year Treasury dropped in January, starting at 4.25% and falling to 4.19%. High-yield bonds were flat. Small- and mid-cap stocks fell 3.9% and 1.4%, respectively. International developed markets ended the month slightly positive, up 0.6%.

What Recession?

The recession that economists broadly feared in 2023 never showed up. The U.S. economy grew 3.1% over the past year, thanks to a resilient labor market that supported strong consumer spending. A year ago, economists surveyed by the Wall Street Journal saw a recession as very likely and projected 0.2% growth for the year. The year was capped by a fourth quarter in which the economy grew at a 3.3% seasonally and inflation-adjusted annualized pace, fueled by household and government spending. The final three months of the year looked a lot like the so-called soft landing Federal Reserve officials are trying to achieve. Growth was strong, while inflation cooled to an annualized rate of 1.7%, below the Fed’s target inflation rate of 2%.

Employers hired at a solid pace in December, ending a year of steady gains for the job market that continues to defy expectations. The U.S. economy added 216,000 jobs in December, with most industries increasing employment, according to the Labor Department. For all of 2023, employers added 2.7 million jobs, a slowdown from 4.8 million in 2022 but a better gain than in the several years preceding the pandemic. Wages rose a healthy 4.1% last month from a year earlier while the unemployment rate held steady at 3.7%. The jobless rate began 2023 at 3.4%, matching lows not seen since the late 1960s, and remains low despite inching higher late last year.

After two years of soaring home sales that started during the pandemic, the housing market skidded to a halt last year. Home sales last year dropped to the lowest level in nearly three decades after elevated mortgage rates and a lack of homes for sale frustrated buyers. Existing-home sales dropped 19% in 2023 from the prior year to 4.09 million, according to the National Association of Realtors. That total was lower than during the subprime crisis and the lowest full-year level since 1995.

U.S. retail sales rose a seasonally adjusted 0.6% in December from a month earlier, according to the Commerce Department. The larger-than-expected gain came after a healthy 0.3% increase in November. From a year earlier, retail sales rose a healthy 5.6% in December. Americans spent more on vehicles, clothing, at department stores and online. Holiday sales during November and December reached a record $964.4 billion, not adjusted for inflation, according to the National Retail Federation.

The Consumer Price Index rose 3.4% in December from a year earlier. Core prices, which strip out volatile food and energy components, rose 0.3% from the prior month. Core inflation was up 3.9% from a year earlier. Meanwhile, the Fed’s preferred inflation gauge, the core Personal Consumption Expenditures Index (PCE), which strips out volatile food and energy prices, increased 2.9% in December from a year earlier, according to the Bureau of Economic Analysis. Core PCE advanced 0.2% from a month ago. The PCE report caps a year that saw inflation decline at a much faster rate than the Fed and economists anticipated. Prices were up 2.6% for the year, not far from the Fed’s 2% target. Core prices were up just 1.9% on a six-month annualized basis.

Low unemployment, moderating job gains and easing inflation are consistent with a soft landing, where inflation cools without triggering a recession.

How to Maintain a Long-Term Perspective

What surprises will 2024 bring us? How might the election impact the markets? Will the Fed be successful in its efforts to engineer a soft landing for the economy? Everyone’s favorite parlor game is trying to guess the short-term direction of the stock market but, as you can see from the chart below, the performance of the stock market in any given year is unpredictable and totally random.

The bad news is we don’t know how the stock market will perform this year. The good news is investors don’t need to know that to be successful in achieving long-term financial goals.

The chart below shows that the stock market over long periods of time has provided returns in a relatively narrow band.

Of course, no one can say for certain whether the future will look like the past, but understanding why the stock market has provided solid returns in the past may give you a bit more confidence in the future. We think there are four primary reasons for these impressive returns:

1. Over the long term, corporate profits have acted like a magnet to pull stock prices higher. As earnings grow, the value of companies has generally increased.
2. Companies often return a portion of their profits to shareholders in the form of dividends, which has added to investors’ returns.
3. Well-managed companies can often raise prices to offset the higher cost of doing business. These price increases often lead to higher earnings and dividends.
4. Stocks are risky to own because earnings, dividends and returns are not guaranteed. For this reason, shareholders often demand a higher return on their investment to offset the higher risk.

Wharton professor Jeremy Siegel, author of “Stocks for the Long Run,” likes to say, “Stocks are the most volatile asset in the short run, but the most stable asset in the long run.” That is why we believe for most investors with long-term goals, common stocks should represent a healthy portion of the investor’s portfolio.