Broker Check
February Market Update

February Market Update

February 20, 2024

A positive start to the new year

Ready for a February Market Update? The economy seems fine. The job market seems fine. So far, there are few signs the economy is about to slip into a recession. In January, the Dow added to gains, setting new highs, and the S&P 500 Index eclipsed its prior high-water mark made two years ago (Yahoo Finance S&P 500). A loss on the final day of the month pared the market’s January advance, but the S&P 500 managed to finish the month above its prior all-time high in early 2022.

Put another way, the stock market seems fine. So, everything is fine, right?

Well, we hit some turbulence on January 31. But down days are to be expected. Blame the decline on Fed Chief Jerome Powell, who made it clear at his press conference that a March rate cut probably isn’t in the pipeline. But was his remark really a surprise? It shouldn’t have been.

In part, the Fed doesn’t want to be bullied into a rate cut. In part, several Fed officials had been downplaying a March rate cut. But, when the boss speaks, people pay attention. Besides, there aren’t yet any definitive signs that the economy is weakening. So, the Fed isn’t feeling that much pressure to hit the monetary gas pedal. However, the Federal Reserve is openly talking about rate cuts this year. A May or June cut shouldn’t be ruled out.

For now, the economy is expanding at a modest pace, inflation is coming down, and the Fed wants to see a little bit more evidence that inflation is headed back to its 2% annual target. Ultimately, we believe the economic fundamentals will clear a path for the market this year.

Before we wrap things up, let’s define a couple of terms: soft landing and recession.

These terms pop up often in the financial press. They may be confusing for some folks; therefore, let’s spell them out.

According to Brookings, the Fed raises “interest rates just enough to slow the economy and reduce inflation without causing a recession. It has achieved what is known as a soft landing…. Soft landings are the equivalent of ‘Goldilocks’ porridge.’ Following a tightening, the economy is just right—neither too hot (inflationary) nor too cold (in a recession).”

The National Bureau of Economic Research defines a recession (a hard landing) as a “significant decline in economic activity that is spread across the economy and that lasts more than a few months.” A recession is accompanied by significant job losses.

The fabled “soft landing” that allows the Fed to cut interest rates as inflation slows (and not from economic weakness) has historically provided the most support for stocks. We view this as the best-case scenario for investors.

Recessions in 1974, 1990, 2001 and 2008 led the Fed to cut rates, but recessions squashed corporate profits, and investors took their cues from weak corporate earnings, not falling interest rates. However, equities benefited from rate cuts in 1984-85, 1995 and 2019. The monetary easing was not in response to a recession but from a recognition that rates had risen enough to slow economic growth and prevent an unwanted rise in inflation.

A slight tap on the monetary pedal was in order, and investors responded enthusiastically.

I trust you have found this review to be informative. If you have any inquiries or wish to discuss any other financial matters, please don’t hesitate to contact us.