Red Hot February for Stocks

March 1st, 2024

The stock market rallied once again this week to close out the best February for the S&P 500 and Nasdaq Composite in nearly a decade. The S&P 500 scored its third record high of the month on Thursday. The gains were not just AI related as all eleven S&P 500 sectors traded higher in February, with cyclical sectors outperforming. The tech heavy Nasdaq Composite also hit an all-time high, its first record close since November 2021. Chip names were among the standouts in Thursday’s rally, with Advanced Micro Devices popping more than 9% to power the indices higher. Market records continued to fall despite more signs of persistent inflation. The Federal Reserve’s preferred measure of inflation, the core PCE index rose 0.40% in January, up from December’s 0.10%, suggesting “higher for longer” remains very much on the table. A rise in business spending also indicated the economy remains resilient to rates, however. Investors widely dismissed the inflation news, optimistic for another AI driven quarter ahead. Bulls kicked off March on a strong foot, smashing their way to more record highs for the S&P 500 and Nasdaq Composite of 5,137.08and 16,274.94, respectively.

Inflation Reinvigorated

Things are heating up on the inflation front. The Fed’s preferred inflation gauge, the PCE Index excluding food and energy rose 0.40% in January. YOY, prices were up 2.80% from year ago levels. That’s still a ways from the Fed’s 2.00% target level. January’s 0.40% gain was also much higher than December’s 0.10% rate. January’s price increases were also a reflection of the ongoing shift to services over goods. Services prices rose 0.60% month-to-month while goods fell -0.20%. Headline PCE, which includes volatile food and energy rose at a slightly slower pace, up 0.30% for the month and 2.40% on a 12-months basis. Consumers, weary from the recent rebound in prices and a strong holiday shopping season, pulled back slightly on their spending in January, down -0.10%. The drop came despite a 1.00% increase in personal income during the month. It may only be a temporary lull for consumer spending as the spring break and early Easter holiday will be sure to bring out the spring breakers and vacationers. That’s likely to put further pressures on services prices in the months ahead.  

Commercial Aircraft Chill Durable Goods Orders

Orders for long-lasting U.S. manufactured goods ranging from toasters to aircraft plunged -6.10% in January, the most in nearly four years. The decline was driven by a sharp drop in commercial aircraft bookings, down -58.90% for the month. Aircraft maker Boeing reported it had received only three orders for commercial aircraft in January, down sharply from 371 in December. That’s what happens when you build planes where you forget to use the fasteners on the doors! Excluding transportation, durable goods orders fell -0.30% last month after slipping -0.10% in December. Meanwhile, nondefense capital goods orders excluding aircraft, a closely watched proxy for business spending plans, rose 0.10% in January. Computers showed solid gains, up almost 6% for the month, suggesting companies continue to open their wallets for the latest technologies.

Final Thoughts

It was a solid month for investors with the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite up 5.17%, 2.22%, and 6.12% respectively. March looks to be starting strong as well on the back of enthusiasm for all things AI. The expectations and the valuations for AI are lofty going forward, leaving little room for disappointment. Some of the AI froth should settle down next week with Fed Chair Jerome Powell making his way to Capitol Hill to deliver the Fed’s monetary policy outlook. Investors will be closely watching for any shift in sentiment from the Fed given that investors have been clamoring for rate cuts as early as this month. Sticky inflation and a resilient economy have pushed those expectations out, but markets are currently pricing in a 73% chance of a cut in June.  A hawkish Powell could move that timeline out and rattle markets as investors reassess the rate outlook. Nonfarm payrolls could also clip some of the bullish enthusiasm if February shows another strong month for jobs growth, reinforcing the central bank’s higher for longer interest rate policy. The coming data on the macro front could be sobering for bulls and lead to some volatility as we progress through March.

The Week Ahead

Mr. Powell heads to Washington to deliver the Federal Reserve’s biannual monetary policy report to Congress. It’s also a big week for economic data with traders pouring over the February nonfarm payrolls and ISM services reports.

The New Corporate Transparency Act and its Impact on Business Owners

Legislation that Congress enacted in 2021 and that took effect on January 1, 2024, is impacting more than 30 million businesses, however, the obligations under the new federal law remain largely unfamiliar to many of those who are affected. The Corporate Transparency Act (CTA) is intended to enhance transparency in business entities, especially small LLCs and partnerships, in order to combat illegal activity such as money laundering, financing of terrorism, tax fraud, trafficking, and more. Under the CTA, certain types of entities called “reporting companies” are required to begin filing identifying information about the individuals who own or control the entity. The information is known as “beneficial ownership information” or BOI, and it must be filed with the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of the Treasury. FinCEN will maintain a centralized, nonpublic database of the information. The reporting requirement applies to an estimated 32.6 million companies, according to FinCEN officials.  It also applies to anyone who owns 25% or more of a limited liability company, partnership, or other small entity and to senior level executives or anyone who has “substantial control” over a company that falls within the scope of the CTA.

Corporations existing prior to January 1, 2024 have until January 1, 2025 to file the required report. Reporting companies created after January 1, 2024 are required to comply with the CTA within 90 days of incorporation. Failure to comply with the reporting requirements or providing false information can result in civil and criminal penalties.  

Under the CTA, a reporting company must provide information about itself, including the reporting company’s business name and any “doing business as” name(s), address, jurisdiction of formation, and IRS taxpayer information.  A reporting company must also report personal information about beneficial owners and individuals with “substantial control,” including name, date of birth, address, driver’s license or passport number, and a copy of approved documents. Information must also be provided about the applicant filing the report on behalf of a reporting company.  All of the information must be kept up to date as well.  

The term “substantial control” includes (1) being a senior officer in a reporting company, (2) having authority over the appointment or removal of senior officers or a majority of the board of directors, (3) having “substantial influence over important decisions” of the reporting company and/or (4) having any other form of substantial control over a reporting company. In a fact sheet on their website, FinCEN explains who can access the information, such as authorized government agencies engaged in law enforcement activity, and the security and confidentiality protocols that must be followed.

The CTA is focused on entities created through formal registration with a secretary of state or a similar office in a state or Indian Nation. Generally, this will include corporations, limited liability companies (LLCs), limited partnerships (LPs), limited liability partnerships (LLPs), and certain business trusts. Sole proprietorships, general partnerships, joint ventures, and trusts are usually not created by filing formation documents and therefore, are generally exempt from reporting. Other types of entities that may be excluded from reporting include nonprofits, publicly traded companies, certain financial institutions, and other entities already subject to federal and/or state regulation.

FinCEN published a “Small Entity Compliance Guide” to help companies meet the reporting requirements of the CTA. Additional revisions and updates may continue to be published in the coming months to further explain requirements around the legislation.

Business owners should consult with legal professionals and review the CTA and their obligations under the legislation, assessing which individuals might qualify as beneficial owners from a substantial control perspective, and to initiate any necessary compliance activities.  As of this writing, the constitutionality of the new legislation is being challenged in court. 

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