Market Update – February 5th, 2024

Author:  Joe Maas, CIO SPG Advisors LLC

February 5th, 2024

Financial Markets:

The week started with little market movement, but equities took a downturn after Wednesday’s Federal Reserve meeting, during which Fed Chair Powell indicated that a rate cut in March is not the Fed’s base case scenario. However, equities rebounded later on in the week, following a robust January jobs report that surpassed expectations. As of close on Friday, February 2nd, the Dow Jones Industrial Average was up by +1.43%, the S&P 500 rose by +1.38%, the Nasdaq Composite showed a gain of +1.12%, and the Barclays Aggregate Bond Index also saw a modest uptick of +0.38% for the week.

Market News

Fed Pause. Last week, the Federal Reserve held its January FOMC meeting, where Fed Chair Powell was largely ambiguous, highlighting the strength of the US economy and the labor market. Then, out of nowhere during the press conference, Powell explicitly told the press that a rate cut in March was not their “base case” scenario – sparking a selloff in stocks. The -1.6% S&P 500 selloff was the worst Fed Day performance for stocks since March of 2023, when the failure of multiple regional banks was unfolding.

Furthermore, the meeting set rate expectations back, as the market is now embracing that May will likely mark the beginning of rate cuts. One month ago, markets were pricing in a 73.6% chance of a rate cut before the May meeting, now markets are pricing in just a 13% chance of a rate cut before the May meeting – a stark shift (CME Group, as of Feb. 2nd).

Until the March meeting, when we will get an updated Summary of Economic Projections from FOMC participants, the main change in Fed expectations will come down to labor market and inflationary data. This data is currently demonstrating that the Fed can probably wait a bit longer, as the January unemployment rate clocked in at a low 3.7% unemployment rate and inflation remains above 2% on an annualized basis.

Source: CME Group

January Employment. In January, the labor market exceeded expectations as nonfarm payroll grew by +353,000 jobs, nearly double what economists had predicted. The unemployment rate came in lower than estimates of 3.8% too, holding steady at 3.7% in January. Job gains stemmed from professional and business services, health care, retail trade, and social assistance, offsetting losses in mining, quarrying, and the oil/gas industry.

Average hourly earnings saw a robust 0.6% increase month over month, twice the anticipated rate, while the average workweek slightly decreased to 34.1 hours. Overall, the resilience of the labor market in this quantitative tightening environment has continued to surpass expectations and will likely push off the proximity of a Fed rate cut.

Source: BLS

Consumer Confidence. Higher rates, news stories of layoffs, and elevated prices aren’t spooking consumers as much as economists had initially expected. In fact, January’s Consumer Confidence survey revealed a 6.3% increase in consumer confidence from December’s levels, marking a two-year high in confidence. All income groups, except households earning $125,000+ saw this increase in confidence, likely attributable to slowing inflation, anticipation of lower rates ahead, and stable employment conditions. Additionally, consumers’ perceived likelihood of a US recession over the next 12 months eased again in January, alongside inflation expectations that fell to a three-year low.

Q4 Earnings. This week, 108 companies in the S&P 500 reported Q4 earnings, with companies broadly posting better earnings growth compared to the previous week. Among the 200+ companies in the S&P 500 that have reported this far, earnings are up +6.8% in Q4 compared to a year ago.

Consumer discretionary emerged as the top-performing sector with an impressive 59.7% year-on-year earnings growth, followed by cyclicals and utilities with growth rates of 19.9% and 19.5%, respectively. Conversely, energy, healthcare, and basic materials saw declines of -33.2%, -27.1%, and -24.6% in year-on-year earnings, making them the worst-performing sectors at this point. However, with over half of the S&P 500 yet to be reported, the landscape remains dynamic, and final results are subject to change significantly based on the performance of the remaining companies.

Source: Fundstrat

 META’s Shareholder Friendliness. Amidst a week full of technology earnings, Meta, the parent company of Facebook, sparked investor attention during their Q4 earnings call on Thursday, February 1st by announcing a new $0.50 quarterly dividend as a move to showcase their robust free cash flow, in addition to a thorough share buyback plan. Following in the footsteps of Apple and Microsoft, Meta joins the list of tech companies that are believed to have enough stable income to pay notable dividends throughout the year, but not long ago, this was not the case. Since 2022, Meta has faced investor scrutiny over extravagant spending and subpar financials but has responded over the last year by trimming costs, resulting in a 22% reduction in employee headcount compared to a year ago.

With these internal adjustments, Meta’s Q4 financial performance proved impressive, with year-on-year revenue jumping 25% and net income nearly tripling from 2022’s fourth quarter. Meta, which includes platforms such as Facebook, Instagram, and WhatsApp, reportedly gained ad revenue some of its higher market share from Google, offering advertisers more targeted solutions for efficient customer reach – a significant competitive advantage in the space. The earnings report, released after market close on Thursday, led to META closing 20% higher on Friday, reflecting heightened investor optimism towards the tech giant.

Summary

Markets saw large price swings this week, starting with a sharp selloff in equities after Fed Chair Powell indicated that a rate cut in March was not their base case scenario. Despite this, markets rebounded later in the week, driven by a robust January jobs report that exceeded expectations. The labor market’s strength, coupled with positive consumer confidence, coincide with the realities of a delayed Fed rate cut. Q4 earnings reports showed better earnings growth this week, as Meta’s impressive Q4 performance was surprisingly marked by a new dividend and share buyback plan, leading to a 20% increase in its stock on Friday.

We appreciate your continued trust.

Thank you,
Joseph M. Maas,
CFA, CFP®, ChFC, CLU®, MSFS, CCIM, CVA, ABAR, CM&AA

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