Stocks Finish Lower Despite Intraweek Record Highs

March 8th, 2024

Equity markets lost steam for the week despite the S&P 500 and Nasdaq Composite Index reaching new all-time highs on Thursday. While the major indices lost between -0.25% and -1.17% on the week, bullishness has started to broaden away from strictly domestic large cap and tech stocks. The S&P 400, which tracks U.S. mid cap stocks, hit an all-time high of 2,968.54 on Thursday. Overseas, the Stoxx 600, which represents large, mid, and small capitalization European companies, punched above the 500-point level to close the week at a record high of 503.26 on Friday. Sentiment remained positive for much of the week, and liquidity continued to flow into equities in reaction to Federal Reserve Chair Jerome Powell’s testimony before Congress. Powell opened the door for rate cuts later this year, which helped spark a rally in bonds and sent the 10 year U.S. treasury yield down to the 4.00% level. On the economic front, February’s nonfarm payrolls report struck the perfect balance, showing that employers added 275K to their payrolls while wage growth moderated. Meanwhile, the ISM Services report showed inflation easing with the survey’s prices index dropping sharply month-to-month. Despite the new highs intraweek, profit taking on Friday left the major indices slightly in the red.

Payrolls Rise While Wage Gains Cool

The labor market continued to surprise to the upside as February payrolls showed 275K new jobs added. That surpassed estimates of 198K new hires. The strong reading would normally have raised alarms given that the Fed has highlighted hiring’s influence on inflation. However, a sharp downward revision to January and December payroll figures to show 167K fewer jobs than initially reported soothed concerns. The downward revisions, combined with a rise in the unemployment rate and lighter wage growth, were enough for market bulls to dismiss February’s headline print. The unemployment rate rose to 3.90% from 3.70% the prior month with no change in the labor force participation rate. Wages meanwhile rose just 0.10% on the month, below estimates and resulting in wages rising 4.30% from the year ago period. The higher unemployment rate and slowing wage growth help build the case for easing inflationary pressures, giving the Fed the confidence they need to begin lowering interest rates later this year.

Final Thoughts

Confidence grew this week on signs the world’s central banks are ready to begin pivoting to lower interest rates later this year. Fed Chair Jerome Powell in his Congressional testimony reiterated the need for more signs of easing pressures, but this week’s data delivered across the board. February’s hiring was greater than expected, but this was parried by previous months’ downward revisions, slowing wage growth and easing service industry prices which all fit nicely into the soft landing plot. Across the pond, European Central Bank President Christine Lagarde signaled a rate cut could come as early as June for the eurozone as inflation remains on track to move toward its 2.00% target level by next year. While both central banks remain data dependent, recent economic reports seem to be favoring the rate cut camp. The timing and the number of cuts, however, still remain a question, but June is increasingly looking like the target. The question for investors now turns to how much of the cuts are already baked into the market and where do markets have to go from here? While a lot of the attention for the market rally has been focused on AI, productivity gains, and the ‘rise of the machines’, behind the scenes there has been a massive shift in liquidity away from money markets. In mid-2023, the Fed’s Overnight Reverse Repurchase program – the ultimate destination for dollars parked in money markets – was about $2 trillion. Today, the program’s balance is less than $500 billion as investors have pulled money out of money markets in order to lock in longer dated bond and equities in anticipation of the Fed cutting short term rates. For context, the program’s balance was around $10 billion when rates were scraping the bottom in 2021. All this to say that there has been a massive amount of liquidity seeking a home in fresh assets – which coincides with the recent rally. Now that the vast majority of that liquidity has found a new home, that tailwind will ease – making records a little harder to come by from here.

Easing inflationary pressures pushed the ISM Services Index lower in February, while still managing to remain in expansion territory. The ISM Services index eased to 52.6 from 53.4 in January. Numbers above 50 indicate expansion while numbers below signal contraction. The decline came amid a sharp drop in the prices index to 58.6, down from February’s reading of 64. The employment gauge also moved lower during the month, falling to 48 from 55 in January. New export orders, imports, and inventory sentiment also posted declines while new orders and business activity rose. Despite February’s softer reading, the services industry still looks primed to continue to expand in the months ahead.

The Week Ahead

By plane, by train, by automobile, folks are headed out of town for Spring Break. Week in Review will also take a spring break from the market moving action. Our next edition arrives on March 22nd where we’ll cover the Fed’s March FOMC meeting along with the latest retail sales, inflation, and housing reports. 

Probity’s Internship Program Recognized

Through Southern Methodist University (SMU) Athletics’ Life After Ball program, our office had the wonderful opportunity to work with an intern named Emily Waller last summer. Emily was featured this week in a video about her experience at Probity Advisors, Inc. where she discusses her internship and what she learned from it. You can view the video about Emily here.

The Life After Ball program is designed to provide student athletes with networking, mentoring, and internship opportunities that will help them develop their post-college careers. Probity Advisors, Inc. has long supported SMU and Life After Ball, and our firm has welcomed a number of interns through the program.

When Emily began her internship, she had familiarity with two programming languages, Java and SQL, and learned a third language called Python. Emily was able to apply her programming skills to write scripts that extracted and organized data across multiple platforms to make it actionable, giving her a deeper understanding of data analytics and system architecture. These are skills that Emily is grateful to have developed, and she credits her internship at Probity with not only providing valuable hands-on learning, but also giving her confidence to lean into her own abilities and tackle new challenges.

Emily is a member of SMU’s track and field team where she competes in the 400 meter hurdles, the 4×400 meter relay, the Distance Medley Relay, and the 400 meter race. She will graduate in May 2025 with an Accounting and Data Sciences minor.