March Update
March delivered new all-time highs across various market indexes. However, the technology-heavy Nasdaq Composite and Nasdaq 100 did not progress at the same magnitude we have become accustomed to since bouncing off October 2023 lows. March seemed to mark a slow rotation away from the biggest technology names into broader economic sectors, as represented by stocks in the S&P 500, the Dow Jones, and the Russell 2000 index. We saw new all-time closing highs on March 28th for the S&P ASX 200 at 7901.2, the Dow Jones Industrial index at 39,807.37, and the S&P 500 at 5,254.35. Earlier in the month, on March 22nd, both the Nasdaq 100 and Nasdaq Composite hit all-time closing highs of 18,339.44 and 16,428.82, respectively. The technology-heavy indexes have been leading trends for over 18 months, and recent price action might signal a market that is extended and looking to take a breather.
The S&P500 had one of the longest streaks without a 2% one-day decline since 2000
The S&P went 949 trading days (3.76 years!) from 5/19/03 to 2/26/07 without a one-day drop of +2%. The recent streak went 260 days without a 2%+ one-day drop.
Source: Bespoke
The current bull market gains are not outsized relative to history.
The graph shows the cumulative returns of past bull markets during the first two years after stocks bottom. The current bull market return is running below the average of the past 12 since 1949.
Source: FactSet, Edward Jones
Markets still favoring Quality Growth.
Remember when unprofitable tech was all the rage in 2021? It never really recovered. All the money went into the Mag7 stocks instead, and to a lesser extent profitable NASDAQ companies.
Source: TS Lombard thru Markets & Mayhem
Non-Profitable Tech relative to US10YR Yields.
This chart explains why Non-Profitable Tech Stocks continue to lose ground to Big Tech. It is the rise in 10y US bond yields that is reducing the value of long-duration stocks, which is what non-profitable tech is.
Source: Goldman Sachs, Bloomberg
In a surprising turn of events, considering large parts of Europe are in recession, the European Stoxx 600 also struck a new all-time high on March 28th, signaling that investors are looking past the current economic headwinds on the continent. However, this upward trend in global market indexes could reverse if solid economic data suppresses expectations of rate cuts later in the year. Accelerating inflation prints could derail the notion of cuts in 2024.
The inflation headline is beginning to rear its head in the US as CPI has started to tick higher again. With headline inflation warming up, the notion of interest rate cuts is beginning to shift. The market has grown comfortable with the idea of three cuts by the end of 2024, but rumblings of fewer or even no rate cuts are cooling things off for now. With these headlines gaining attention, an increase in volatility is anticipated. However, the US economy remains strong and has so far managed to absorb the interest rate hikes. The US 2-Year Treasury yield and the longer-dated US 10-Year Treasury yield were relatively flat for March, with both climbing 11 basis points.
US Rate-cut expectations were revised downward last week.
Financial stress is the lowest since the Fed began raising rates, which begs the question - why cut this year? For the first time this year, markets now only see 3 interest rate cuts in 2024. Just 3 months ago, markets saw SEVEN rate cuts in 2024 with rate cuts beginning this month.
Source: St Louis Fed, CME
The Reserve Bank of Australia (RBA) left rates on hold at 4.35% after their March board meeting, which from 2024 has taken on a new look. The board has shifted from regular monthly meetings followed by a 2:30 pm release on the first Tuesday of the month to a model similar to the US Federal Reserve's Open Market Committee, meeting every 6 weeks or 8 times a year to deliberate over two days. The board noted encouraging signs that inflation was moderating in Australia, as goods inflation moderates, but services inflation remains elevated and is moderating at a more gradual pace. Higher rates are proving effective in creating a sustainable balance between aggregate demand and supply in the economy. Labor conditions are continuing to ease, albeit gradually, but remain tighter than ideal for full employment and inflation targets.
From an economic perspective, while inflation shows signs of moderating, the RBA governor outlined that the economic outlook remains uncertain. December national accounts confirmed a slowing in growth, while household consumption growth remains weak, driven by high inflation and interest rates. Real incomes have largely stabilized, with some growth forecast into the end of 2024 to support consumption. While there are favorable signs of goods price inflation abroad, services price inflation has remained persistent, with concerns that a similar trend will occur in Australia. Despite several risks, the outlook is not all doom and gloom. The much-feared mortgage cliff, expected to derail the Australian economy as mortgages rolled off low fixed rates into higher floating rates, has been less impactful. The RBA estimates that only around 5% of households with a variable rate mortgage have mortgage and essential living expenses greater than income. Supporting this, the bi-annual Financial Stability Review (released in March) found that while many households and businesses continue to face challenges, most continue to service debt and meet expenses on schedule. The Review also found that most households have managed the pressure that inflation and interest rates place on their finances and that these pressures are expected to ease as inflation moderates further.