CWG Investment Committee: Stocks Soar, Inflation Hints at Persistence

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The rally continued in February as all major US indices made new all-time highs. The S&P 500 climbed above 5,000 for the first time ever and gained 5.2% for the month. The Nasdaq again raced up 6.1% while the Dow remained in its familiar lagging position, increasing just 2.2%.

February was the 4th consecutive month of gains. The momentum has been significant, with the S&P 500 marking gains for 16 of the last 18 weeks. This has not happened since 1971, according to Deutsche Bank.

Bulls are encouraged that the rally broadened out. Every sector in the S&P 500 finished in the green, with Consumer Discretionary leading the pack at 8.7%, followed by Industrials at 7.2%, and Basic Materials up 6.5%. That trio had not previously led the way.

We are welcoming every bit of market advancement, as it gives us more protection against the inevitable pullback.

U.S. bond prices retreated as yields went up after The Fed minutes from the January meeting included hawkish takeaways. The U.S. 10-Yr Treasury rate started the month at 3.88% and climbed to 4.23% by the end. The yield curve is still inverted, and we continue to take advantage with treasury bills and short dated notes in your investment portfolios.

Q4 Earnings season is complete and large cap companies generally exceeded analysts’ expectations, reporting a modest 4% growth in earnings for the year. This marks the second straight quarter of year-over-year growth.

A look under the hood shows the S&P 500 earnings statistics are powered by the tech giants and their exceptional profit margins. Our investment committee noted that the Q4 earnings reports of the tech giants were perhaps the greatest display of earnings power and revenue growth we’ve seen in business history.

Small and mid-cap earnings were the opposite. According to most analysts’ metrics, these companies are in an earnings recession. Small cap companies are experiencing weaker earnings compared to large caps, partly due to their higher proportion of floating-rate debt. As the Federal Reserve has raised interest rates in recent years, this debt has become more expensive to service, squeezing small cap profit margins.

The economy remains on solid footing while inflation continues its downward trend. Wall Street has labeled economic reports of the first two months as a “Goldilocks scenario” where data is neither too-hot, nor too-cold. This is an ideal environment for stocks.

Unemployment came in for the third consecutive month at 3.7% and for the 24th consecutive month under 4%.

While inflation data continued the downward trend, it did show mixed signals. The CPI showed a slight decline to 3.1% year-over-year but increased 0.3% month-over-month, which was above expectations. Other inflation gauges showed similar results and give the Fed the ammo they need to stay hawkish going into their March 20th meeting.

Overall February presented a positive picture for the stock market, with broad-based gains and resilient economic data. Concerns regarding slowing disinflation and overextended valuations remain.

With spring just around the corner, we are committed to navigating the markets and helping your investments blossom.