The Pinnacle: February 2024
February 2 0 2 4 • I S S U E 38
February Markets
Source: investing.com (1 March 2024)
Stock markets generally performed well in February. The STOXX 600, the FTSE-All Share, and the S&P 500 were up 2.20%, 0.07%, and 2.78% respectively over the last month. Within equities, emerging markets performed well, up 4.8% over the month. Fixed income on the other hand generally performed poorly, with the Bloomberg Global Aggregate index down 1.3% for the month. Likewise, commodities also generally performed poorly for the month, with the Bloomberg Commodity Index down 1.5%.
In the US, the ‘Magnificent Seven’ stocks continued to grab headlines with these companies generally either meeting or exceeding earnings expectations. Over 90% of S&P 500 firms have reported earnings, and around 75% of them have beaten expectations. Optimism from earnings is partly responsible for the 6.84% year-to-date (YTD) climb for the S&P 500, a 7.20% YTD climb for the NASDAQ Composite, and a 3.47% YTD climb for the Dow Jones. Fixed income in the US was largely in line with global performance for the month. With Headline Inflation coming in at a worse-than-expected 3.1% year-over-year (YoY), US Treasuries fell 1.3% for the month.
Positive equity market performance was experienced in the Eurozone as well with the MSCI Europe Ex-UK index rising by 2.8% for February. In line with global performance, European fixed income also performed poorly for the month, with German Bunds for example down 1.4%. In the region sentiment and the general economic outlook are seemingly improving. The Sentix Investor Confidence Index is an index that is an outlook for the Eurozone economy over the next six months compiled from around 2800 investors and analysts. This index rose to -12.9 points in February, significantly up from -15.8 points in January.
UK equity performance has lagged behind their developed market counterparts this year. While the FTSE All-Share was up slightly over the last month it is down 1.63% YTD. Earnings in the region were disappointing which led to analysts downgrading earnings growth expectations to 4.7% YoY. UK Gilts are down 3.6% YTD. This comes as a slower-than-expected decline in wage growth has seen investors shift their expectations for rate cuts later into the year.
The MSCI China Index performed strongly during February, up 8.6% for the month. Increasing economic activity over the Lunar New Year Period and a larger-than-expected cut in the Five-Year Loan Prime Rate from 4.20% to 3.95% were partly responsible for improving sentiment and strong equity market performance. Other Asian Emerging Markets also performed strongly, with Hong Kong's Hang Seng Index up around 1.66% over the last month and India’s Nifty 50 Index up about 1.68% over the same period, as of the 6th of March.
February was a month defined by generally strong equity market performance and continuing trends in terms of economic resilience in major economies. The growing consensus that we will not see rate cuts as soon as originally expected negatively impacted bond performance for the month. However, it is important that investors do not overlook the diversification benefits of bonds and maintain a long-term view for their portfolios.
Central Bank Update
The picture for central banks globally has changed dramatically since a year ago. Attention has now turned to when and the extent to which Central Banks will start cutting rates this year. The consensus for three of the world's major central Banks, the US Federal Reserve (Fed), the European Central Bank (ECB), and the Bank of England (BoE) is that hiking cycles are complete and rates will start being cut at some point later this year.
It is important to reemphasise the role of central banks. A central bank plays a crucial role in the economy by managing monetary policy, regulating financial institutions, and overseeing the stability of the financial system. It uses tools like interest rate adjustments, open market operations, and reserve requirements to influence the money supply and credit conditions in the economy. These tools are used to achieve macroeconomic objectives such as controlling inflation, stabilizing prices, and promoting economic growth.
The Fed is thought to be done raising rates for its current cycle. This comes with the current Federal Funds Rate sitting at a range of 5.25% to 5.50%. This comes after eleven rate hikes culminating in a 525-basis point rise in the Federal Funds Rate. As of the 1st of March, the latest inflation numbers show US Headline Inflation at 3.1% year-over-year (YoY). This is a long way down from the peak of 9.1% in July of 2022, but still above the Fed's 2% target. Attention now is largely on when we will see the Fed start to cut rates. The Fed itself has forecasted it will make three 25-basis point cuts before the end of 2024. The Fed has already ruled out a rate cut for their March meeting; however, many analysts believe we could still see a cut in the first half of the year.
The ECB currently has the main policy rate for the Eurozone set at 4.50%. This comes after ten rate hikes since July of 2022 culminating in 450 basis points of rate hikes. Preliminary inflation numbers for February show inflation having fallen to 2.6% YoY, significantly down from the 10.6% high in October of 2022. Market sentiment is edging towards a possible rate cut as soon as April. However, policymakers continue attempts to lower expectations of a rate cut in the near future with members of the ECB wary of declaring victory over inflation too soon.
The BoE currently has their main policy rate for the UK set at 5.25%. The region has experienced 14 rate hikes since December of 2021 culminating in 515 basis points of hikes. The latest UK inflation numbers show headline inflation at 4.0% YoY, down from its peak of 11.1% in June of 2022. Just as the two regions discussed previously, the consensus is that the BoE is done hiking rates but that we’ll have to wait a bit longer than originally anticipated for a rate cut. While the market had originally priced in a cut for the earlier in the first half of the year, analysts from Godman Sachs predict the first of five consecutive 25-basis point cuts occurring in June. While timing may differ in other forecasts, the general consensus is that rates will stay on hold for longer than originally expected.
While there is growing consensus on the path forward for major central banks in 2024, debate remains. Inflation numbers and the general strength of their respective economies will be among the most important considerations when central banks decide on their policy actions. It is essential that investors monitor central bank policy actions and their effect on the markets this year.