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Market Recap – February 26, 2024

Keel Point

February 26, 2024

Financial markets fluctuate with news of the day – latest inflation or jobs report, GDP estimates, Fed meetings and minutes, and earnings reports – but it is the fundamental strength of the U.S. economy and businesses that is driving stock prices.  The S&P closed the week up 1.34% and is up 7.29% year-to-date.

  • Fundamentally, the U.S. economy remains strong: GDP growth in 2023 averaged 2.5% and is on a path to 2.4% growth in 2024.  New jobs created has surprised on the upside, with higher average wage growth that is offset by rising productivity that keeps employment costs in check.
  • Two weeks ago, when the January CPI was higher than expected, albeit lower for the latest twelve-month period, stock markets became volatile. The S&P closed down more than 1%, and the Russell 2000 index of small-cap stocks dropped by approximately -4%.
  • Later this week, the Fed’s preferred core Personal Consumption Expenditures inflation measure also likely will report higher than the markets are hoping for. Both are a result of higher “shelter” costs driven by higher owner equivalent rent – what a homeowner would expect to get if he/she rented out their home, even though new lease rates for rental properties are declining.
  • What is changing, however, is that stock market prices are less and less driven by inflation or what investors believe the Fed will do next, and instead by growing corporate revenues and profits. Since October 2022, stock prices have been rebounding even as the Fed has raised rates, because of the strong economy, rising revenues and earnings. Fed rate cuts, when they come because of the Fed achieving its 2% inflation target, will also help raise corporate earnings.
  • While admittedly an outlier, Nvidia surprised last week with 765% year-over-year earnings growth, a tripling of sales revenues, and a stock price jump of 16% in one day. This news helped power other growth and technology companies to higher prices as well.  Nvidia shares, treated as a proxy for AI demand, are now the most traded stock by value.

The U.S. economy has performed above recent historical averages, and better than the next three largest global economies:  China, Germany and Japan.  Both Germany and Japan are in recession and China’s economy continues to stagger under the weight of policy mistakes. 

  • So, it is surprising that the China, Japanese and European stock markets have been performing as well or better than U.S. markets recently. Japan’s stock market last Friday closed above where it traded the last day in 1989 before its asset bubble burst in 1990.
  • In the category of where U.S. presidential elections can make a difference, a re-elected President Trump threatens larger tariff increases on Chinese goods entering the U.S. thereby likely shifting further production out of China and towards Mexico, Poland and Vietnam.

Disclosure:  Securities offered through Keel Point Capital, LLC, Member FINRA and SIPC.  Brokerage and Investment Advisory Services are offered under the Keel Point brand. Investment Advisory Services offered by Keel Point, LLC, an affiliate of Keel Point Capital, LLC. While reasonable efforts have been made to provide data from sources considered to be reliable, no guarantee of accuracy is given. Keel Point does not give tax, accounting, regulatory, or legal advice to its clients.

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