Stocks Dance to Record Highs
March 22nd, 2024
Stocks received a solid assist this week from Federal Reserve Chair Jerome Powell, helping markets break new highs. Following the conclusion of the Federal Open Market Committee (FOMC) meeting on Wednesday, Powell eased investors’ concerns over whether the uptick in recent inflation reports would prompt a more aggressive posture from the central bank. The Fed Chair generally dismissed the reports, noting the recent increases were merely “bumps in the road” on the way to the 2.00% target level. The central bank also not only reiterated its belief that the peak in short-term interest rates has been reached, but also that three interest rate cuts remain on the table for this year. This prompted a strong market rally on Wednesday with all three major indices-the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite setting record highs. The new records came despite a relatively quiet week for economic data. Home sales showed a sharp jump in February which follows last week’s strong retail sales report. Despite the excitement over the Fed’s positioning, markets cooled slightly on Friday but the Dow, S&P 500 and Nasdaq all posted solid 2%+ gains on the week.
Fed Sticks to Three Rate Cuts
The Federal Reserve held its March FOMC meeting on Tuesday and Wednesday, after which it announced it would hold benchmark interest rates steady in a range of 5.25% to 5.50%. Coming into the year, market participants had anticipated the Fed to trigger rate cuts at the March meeting, but the uneven pace of core inflation over the last several readings has led the Fed to pivot more slowly. Last week’s February CPI report showed both topline and core prices, which exclude food and energy, rising 0.40% for the month. Year over year (YOY), core prices were up 3.80%, well above the 2.00% target level. Shelter was the main inflation driver for the month, up 0.40%. Producer prices, which are considered a leading indicator as they indicate costs early in the supply chain and often feed into consumer prices, also jumped in February, up 0.60%. Two thirds of that increase was attributable to a 1.20% surge in goods prices, their biggest increase since August 2023. Despite the hot inflation reports, the Fed attributed the increases to seasonal factors, and still believes the downward trajectory in prices remains on track. However, it wants to see further evidence despite believing it will still cut three times between now and the end of the year. That should help maintain economic momentum and keep the labor market strong and consumers spending.
Homes Sales Spike
High prices didn’t seem to deter homebuyers in February. Existing homes sales surged 9.50% to an annualized rate of 4.38 million units. Strong demand pushed the median price of a home up 5.70% from year ago levels to $384,500 and a record high for February. The number of homes on the market also rose, up 5.90% yoy to 1.07 million. Despite the rise, supply remains tight at 2.9 months, keeping it a seller’s market. Six to seven months’ supply is historically considered a healthy balance between supply and demand. All cash buyers remain the force to be reckoned with, however, as they accounted for about 33% of all sales. That’s up from 28% a year ago. First time buyers and mortgage borrowers may find better luck in the new home market with homebuilders feeling more optimistic these days. Homebuilder sentiment was positive in March for the first time since July and gained for the fourth straight month on better demand despite stubbornly high mortgage rates. We’ll see if demand can continue to remain strong as we enter the typically strong homebuying season.
Final Thoughts
It is shocking how quickly a quarter goes by, but believe it or not, next week we’ll close the books on Q1. Not surprisingly, this has been a macroeconomic dominant market, during which investors have focused on the Fed, inflation, and the timing of anticipated rate cuts. Under the hood, the microeconomic components have all played their parts as well. Corporate earnings have reaccelerated. The labor market is holding strong, and the consumer just continues to find a way to spend. It is uncanny, and unsettling to those of us who have been around long enough to know that with markets – things are good until they aren’t. There are no obvious bubbles – at least within traditional asset classes – and with nothing weighing on sentiment, the S&P has managed to climb nearly 10% for the quarter while rising 27% over the last two. The S&P 500 is now approximately 8% higher than it was relative to the last cycle’s previous peak. This starts to feel lofty but not absurdly so. A lot of the market’s return can be justified in having avoided a recession and on the expectation that 2024’s earnings will grow 11%. Conditions for markets remain constructive, and with central banks now entering an easing phase, investors are betting there is more to be gained. In the 13 times the S&P 500 has risen more than 10% in the first calendar quarter of a year, there is only one instance in which returns were negative over the following three quarters, according to Angelo Kourkafas, Investment Strategist at Edward Jones. That sole instance was 1987 – a year that included October 19th – otherwise known as Black Monday when the Dow lost 22% in a single day. There are two lessons in this observation. The first, and most salient, is that the odds favor additional gains for markets from here. The statistics bear that out as do the fundamentals with liquidity moving from cash to other assets in anticipation of rate cuts in Q2. The second lesson is that when the odds don’t work out, remain invested. An investor who entered the market just prior to Black Monday, and who remained invested, would have fully recovered their losses in less than two years. More impressively, if that same investor had remained invested until today, they would have earned a 12,198% return on their money. Q1 certainly provided a rewarding start to the year and while Q2 will almost certainly be choppier than what we’ve become accustomed to over the past six months, the odds continue to favor investors over the remaining quarter.
The Week Ahead
The year is flying by with the first quarter drawing to a close next week. It will also coincide with an early Easter holiday. In observance of Good Friday, markets will be closed on Friday, March 29th. The next edition of our market commentary, Week in Review, will be available on April 5th with the latest nonfarm payrolls, manufacturing, and services reports.
Do Nothing and Other Travel Trends
This year is shaping up to be another monumental year for travel, according to a newly released report by American Express Travel. The 2024 Global Trends Report revealed that 84% of respondents are planning to spend more or the same amount of money on travel this year compared to 2023. In a separate study, 93% of survey respondents indicated plans to travel in the next six months, the highest percentage since March 2023.
Many travelers are opting for snoozes and sunsets over jam-packed vacation days filled with adventures and activities. A February 2024 survey by Longwoods International, a travel industry research firm, shows that more travelers are seeking out opportunities to just rest and recharge during their time away from their busy lives. This trend is in contrast to the concept of “revenge travel,” a term that gained popularity in the wake of the pandemic as individuals indulged in travel experiences and adventures that they weren’t able to do during periods of lockdown, travel restrictions, and uncertainty. When borders reopened, travelers were eager to check off many long-awaited trips from their bucket lists. Given that travelers have been able to take big, adventure-packed trips, they are now in pursuit of something quieter and stress-free. In the Longwoods International survey, “rest and relaxation” rose ahead of having “a fun time” and spending “time with immediate family” as the main motivator for leisure travel. In order to meet this desire, travelers are opting for “all-inclusive” resorts that offer simplified bookings and stress-free planning. All-inclusive properties include everything in one resort fee, from the room rate to the meals. Bookings for all-inclusive resorts in the Americas are up 11% thus far in the first quarter of 2024 compared with the same period last year, according to a spokesperson from Hyatt. These types of properties include proximity (having everything nearby), predictability (knowing what to expect), flexibility (trying new foods and experiences without having to pay for something you don’t like), and familiarity (knowing exactly where to go).
Once considered a travel choice for budget-conscious consumers, all-inclusive resorts are evolving to meet the needs of a range of travelers, upgrading their properties and enhancing amenities. Additionally, many luxury hotels are rapidly growing their all-inclusive portfolios to attract affluent travelers with high quality meals and experiences such as culinary classes, spa and wellness treatments, cultural immersion activities, and more. Marriott which previously had only one all-inclusive property has grown the number of all-inclusives in their portfolio to more than 30. Another effect of rise of rest-oriented travel is the surge in popularity in cruising. Carnival Corporation which owns nine cruise lines, such as Holland America, Princess Cruises, and other brands, reported its cruise bookings reached a historic peak as it closed out the fourth quarter of 2023. The company had more first-time cruise passengers in the last quarter of 2023 than it did in the same period in 2019. Almost two-thirds of its 2024 occupancy is already booked.
Earlier this month, the Wall Street Journal published an article, “The Rise of the Do Nothing Vacation,” sharing stories of travelers trading in safaris through the South African jungle and backpacking trips through Thailand for the adults-only Secrets resort in Mexico. One traveler summed up his new vacation goals with the observation that he discovered he is “really good at doing nothing.”