Market Note – March 5, 2024

By Hightower Great Lakes on March 5, 2024

Economic Growth With Manufacturing Renaissance

The second preliminary fourth quarter GDP report confirmed continued strong economic growth with fourth quarter GDP expanding +3.2% y/y.  Within the GDP report, personal consumption increased +4.8% y/y, personal income increased +4.8% y/y and the personal savings rate recorded 3.9% y/y.

Within GDP, the personal spend was driven by an upward revision in services spending with growth up 2.8% y/y. These figures are all indicative of a strong labor market – initial claims remain well-below recessionary levels, something we’ve highlighted for the last few years. 

Manufacturing benefits continue to flow into the economy. In February, the S&P Global Manufacturing PMI conditions improved at the fastest pace since July 2022. New orders increased for the first time in 20 months, while total production output recorded a nine-month high.

New orders are important to watch – this is a leading indicator within the manufacturing arena. Data indicates a persistent recovery unfolding in the goods-producing sectors, following the prior one-and-a-half-year downturn.

Economic strength has helped earnings, and we are starting to see a broadening into other sectors that will benefit from above average growth such as energy, financials, industrials, and even small caps and cryptocurrencies. In fact, the SPX has rallied 16 of the last 18 weeks because of the broadening. We haven’t seen this kind of trend since 1971.

Chart 1: Manufacturing Rebound[1]

Lowest PCE Inflation Since 2021

Core PCE inflation was up 2.8% y/y in January, and headline PCE inflation was up +2.4% y/y. The Fed’s target remains 2.0%. These results were in line with expectations and managed to subdue the “rising inflation” overhang. Nonetheless, inflation remains above the Fed’s expectations and has even led some economists to predict zero rate cuts in 2024.[2] Lower inflation translates into better earnings.

Broad Earnings Expansion, Investors Jumping In

Fourth quarter earnings are reporting solid growth: while communication services posted 9% growth y/y and technology rose 7% y/y, there were other sectors that held their own with healthcare +8%, financials +7% and industrials +6%. Major themes include lower costs, volume normalization and secular demand. Overall, sell-side strategists are increasing S&P 500 price targets.

Stock market performance is strong year-to-date; the S&P 500 is up 8%. Charles Schwab reported in its monthly cash balances that it held $6.8 billion cash in January versus expectations for $9 billion. That money went into “risk assets.”

Stock markets experienced solid inflows throughout the month of February with equity ETFs hauling in about $44 billion. There is plenty of demand and “FOMO” related to anything AI.[3] PC demand is picking back up as a result of the AI theme. We are watching a consumer product cycle unfold.

On the flipside, there remains significant apathy in certain sectors, like energy and materials. On Friday, crude oil prices moved above $80 for the first time since November and finished the week up +4.7%. Over the weekend, OPEC+ announced it has agreed to extend voluntary cuts to production. There is value in these sectors.

Fixed Income

U.S. Treasury yields rallied across the curve last week as PCE data came in-line with estimates and avoided a blowout report like CPI earlier in the month; 2-year yields led the rally, with yields decreasing 10 bps.

Eyes are on jobs data and Powell’s semi-annual testimony on Capitol Hill this Wednesday. Corporate spreads remain tight, and Munis remain rich despite the highest tax-exempt issuance since 2007.

The Week Ahead

Earnings – Wednesday: FL; Thursday: KR, COST, AVGO.

Economics – Tuesday: ISM Services (February), Super Tuesday; Wednesday: ADP Employment Survey (February), JOLTS Job Openings (January), Fed Chair Powell appearance before House Financial Services Committee; Thursday: Fed Chair Powell appearance before Senate Banking Committee; Friday: Nonfarm Payrolls and Unemployment Rate (February).

Return for Selected Indices^[4]

Click here to read last week’s Market Note (2/26).

Disclosures

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This document was created for informational purposes only; the opinions expressed herein are solely those of the author(s) and do not represent those of Hightower Advisors, LLC, or any of its affiliates.

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[1] Source: S&P Global. As of March 1, 2024.

[2] Source: Yahoo! Finance. As of March 1, 2024.

[3] Source: Bloomberg. As of March 1, 2024.

[4] Source: Bloomberg. As of March 1, 2024.