A Potemkin Village or Not?
Stock Market Updates
In March 2024, the stock market continued its upward trajectory, marking a strong performance across various indices and sectors. Here is a detailed summary of the key developments:
Overall Market Performance
Global Equities: Global stocks rose by 3.1% in March, continuing their fifth consecutive month of gains and achieving the longest positive monthly streak since 2021[1] [2].
U.S. Equities: The S&P 500 increased by 3.1% for the month, contributing to a 10.16% gain for the first quarter of 2024, its best start since 2019[3] [2]. The Dow Jones Industrial Average also saw a rise of 2.21% in March [3].
Sector Performance
Energy and Materials: These sectors were the best performers, driven by higher commodity prices, with oil prices rising nearly 5% to $87 per barrel (Brent) [1].
Technology: While the technology sector had a modest gain of around 2% in March, it remained a significant contributor to the overall market performance, especially with Nvidia continuing to benefit from the AI trading frenzy [4] [3].
Notable Stock Movements
Nvidia: Nvidia's stock saw a significant increase of 9.82% in March, continuing its strong performance in 2024.
Tesla: In contrast, Tesla's stock declined by 13.25% during the month.
Apple: Apple experienced a decline of 4.55% in March.
Economic and Policy Context
Federal Reserve: The Federal Reserve maintained its target rate range at 5.25%-5.50% and signaled potential rate cuts later in the year, contributing to market optimism [1] [2].
Inflation: The core Personal Consumption Expenditures (PCE) index showed a year-over-year increase of 2.8% in February, slightly lower than January's 2.9%, which aligned with market expectations and supported the case for future rate cuts [3].
Global Developments
Europe and Asia: European and Asian markets also saw gains, with the Eurozone up 4.2% and Japan rising 3.0% in March1. The Bank of Japan increased its interest rates for the first time in 17 years, moving from negative rates to a range of 0%-0.10% [2].
Market Sentiment
Investor Optimism: Despite concerns about high interest rates and potential economic slowdowns, investor sentiment remained positive, driven by strong earnings reports and expectations of easing inflation [4] [3].
Volatility: Subdued volatility persisted, with the CBOE S&P Volatility Index (VIX) finishing the quarter at a mild 13.01 [2].
Overall, March 2024 was marked by continued strength in global equities, driven by robust sector performances, positive economic indicators, and cautious optimism regarding future monetary policy adjustments.
Bond Market Updates
In March 2024, the bond market exhibited notable movements, influenced by economic data and Federal Reserve policies. Here is a detailed summary of the key developments:
U.S. Treasury Market
Yields: Treasury yields decreased slightly across the curve, with the 10-year U.S. Treasury yield ending March at 4.20%, down from 4.25% at the end of February[5]. This slight decrease deepened the inversion in the middle of the curve[6].
Performance: The Bloomberg U.S. Treasury Bond Index gained 0.64% for the month but fell 0.98% for the quarter [6]. The 30-year U.S. Treasury Index rose by 0.77% in March but was down 4.06% for the quarter [5].
Corporate Bonds
Investment Grade (IG): The Bloomberg U.S. Corporate Investment Grade Index increased by 1.23% in March but was down 0.41% for the quarter [5]. IG fixed income was viewed as attractive due to relatively high nominal yields, despite a defensive risk posture due to tight credit spreads [6].
High Yield: High yield bonds performed well, with the Bloomberg U.S. High Yield Index gaining 1.18% in March and 1.47% for the quarter. High yield bonds often follow stock market trends, which were positive during this period[5].
Municipal Bonds
Yields and Performance: Municipal bond yields moved in a tight range, with increases across the curve, particularly in shorter maturities, further inverting the curve. The Bloomberg Municipal Bond Index was flat for March but fell 0.96% for the quarter [6].
Issuance: Municipal bond issuance in March was nearly $35.3 billion, about 10% higher than the previous month and 4% higher than the same month in 2023. Year-to-date (YTD) municipal bond issuance reached almost $100 billion, 24% higher than the first quarter of 2023 [6].
Economic Context
Federal Reserve: The Federal Open Market Committee (FOMC) held off on a rate cut in its March meeting, maintaining the target rate range at 5.25%-5.50%. The decision was interpreted as dovish, with the Summary of Economic Projections still indicating three rate cuts in 2024 [6].
Inflation and Growth: Key economic data included strong employment reports, higher inflation readings, and an upward revision of Q4 GDP. The core Personal Consumption Expenditures (PCE) index showed a year-over-year increase of 2.8% in February, slightly lower than January's 2.9% [6].
Market Sentiment
Volatility: Bond market volatility fell even lower in March, as measured by the Intercontinental Exchange (ICE) Bank of America/Merrill Lynch Option Volatility Estimate (MOVE) Index [6].
Investor Outlook: The market reassessed the level at which interest rates are restrictive for the economy, with a "No-Landing" scenario becoming a possibility and a "Soft-Landing" appearing realistic. The expectation is for the Federal Reserve to reduce its target rate to 4.75% by year-end 2024 as core inflation moves towards the 2% target, the economy slows, and unemployment rises [6].
Overall, March 2024 saw a mixed performance in the bond market, with slight decreases in Treasury yields, solid returns in corporate and high yield bonds, and stable municipal bond yields. The economic context and Federal Reserve policies played significant roles in shaping market movements and investor sentiment.
Commentary:
Many people recognized that in the early 2000’s that things were off with the US housing market. The sentiment grew and grew as the price of housing compared to what people could reasonably afford was exacerbated by low interest rates, no-income loans, etc. It even got to the point in that as a upper classmen in my undergraduate days I made a bet with my dad about what his house was really worth…if he would have put his house where is mouth was, we both would have made a lot of money, but that is another story for another day. There was money to be made. There is money to be made during bubble, but there is a point in which you have to take your capital off the table and only play with house money.
The general stock market continue to rip along. But in some ways it feels like the Potemkin Village. We still have an inverted yield curve with the 2yr vs 10yr, inflation is still a high, government is still spending like a drunken sailor (no offense to our sailors friends), and the deficit is still at all time highs. On on the other had, Mr. Powell suggested that three rate cuts were still on the table…is the government building (or has built) its own Potemkin Village when it comes to the health of the economy or the war on inflation?
Conclusion:
Like with all bubbles when you admit that there is one, this is the first step. How you approach the market going forward once you acknowledge that there is needs to be with both hands on the steering wheel.
There is still several things that are pointing toward a recession and a pull back in the general market. However, like my dad and I during the 2006 – 2007 run up on the real estate if we don’t play the game, we are not going to make as much money as we could. HOWEVER, and this is a big however, it comes down to risk tolerance and other personal factors. It was not right for my parent’s situation to sell their house, rent for two to three years than buy back in.
Within the our clients portfolio we continue to keep focused on the fundamentals like, risk tolerance, protecting the downside, strategically allocating to risk asset and tactically shifting around the perimeter of the portfolio through the satellites.
Model Performance Update
Changes to the model portfolio in March
- Buy 3% SPSB
- Buy 1% EBND and VWOB
March 2024 performance with benchmark
March YTD performance with benchmark
If you were to have any questions regarding the above, please reach out to us to set up a one to one meeting to review your situation.
Sincerely,
Bryant Andrus, MSF, CFP®
President
SBC Investment Management
P: (602) 641-5996
M: (319) 520-2033
E: bandrus@sbcinvestmentmanagement.com
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[1] https://www.rothschildandco.com/en/newsroom/insights/2024/04/wealth-management-monthly-market-summary-march-2024
[2] https://www.perigonwealth.com/global-market-commentary-march-2024
[3] https://www.nasdaq.com/articles/march-first-quarter-2024-review-and-outlook
[4] https://finance.yahoo.com/news/live/stock-market-today-ai-frenzy-leads-stocks-to-rip-roaring-first-half-of-2024-133047223.html
[5] https://www.ccmg.com/benchmark-review-monthly-recap-march-2024/
[6] https://www.breckinridge.com/insights/details/march-2024-market-commentary/