Steady Highs for Spring

By JSF Financial on Apr 25 in Market Update

Quick Take: Stock markets join interest rates in staying higher for longer as economic strength continues.^[1]

Back in 2022, the phrase “higher for longer” had a tendency to strike fear in markets. The concern was that interest rates would stay high for too long and squash growth.

Now that we seem to be on the cusp of an economic soft landing and a rate cut cycle – even with the Federal Reserve Bank (“Fed”) pushing out rate cut expectations – assets ranging from stock markets to gold have been sprinting to all-time highs.^[2]

The backdrop for risk-taking has been supportive, according to BlackRock strategists, as market confidence grows with Fed messaging and falling inflation.^[3] Benchmark U.S. stocks gained for a fifth consecutive month in March, as the S&P 500 closed out its strongest first quarter since 2019, up 10.2% (+3.1% for the month).^[4]

Source: https://www.bloomberg.com/opinion/articles/2024-04-02/rate-cuts-a-longer-for-higher-good-friday-from-the-fed

Bond yields and prices have been relatively stable, with benchmark 10-year Treasury yields effectively trading in a range around 4.25% for the last 18 months.^[5] Since the end of 2023, bond yields have risen (prices lower), leaving stocks as the clear outperformer.^[6]

Market Tailwinds

Solid corporate earnings, falling inflation, and upcoming interest rate cuts have provided tailwinds for stock markets.^[7] In the last quarter of 2023, earnings for S&P 500 companies grew at a brisk 10.1% pace, more than double an expected 4.7% increase.^[8]

Source: https://www.reuters.com/markets/us/how-us-stock-market-rocketed-through-first-quarter-2024-03-28/

Market breadth is improving. The “Magnificent Seven” top tech and growth stocks fueled around two-thirds of the S&P 500’s gains last year, but so far, they’ve contributed to 37% of first-quarter stock gains, with performance diverging.^[9]^,[10] We are now seeing a broader rally that includes sectors like energy, financials, and industrials.^[11]

Underpinning these trends are strong economic growth and labor markets, supporting the February consumer spending that rose the most in just over a year.^[12]

February job growth exceeded consensus expectations, with the addition of 275,000 new jobs.^[13] Unemployment increased slightly to 3.9%, but the rate has been under 4% for 25 consecutive months, setting a record going back to the 1960s.^[14] With the supply of labor growing, Fed officials have become more comfortable that strong job growth can continue alongside lower inflation.^[15] This also gives the Fed cover to maintain higher interest rates for a longer period.

Fed and Market Aligned on 2024 Cuts

Especially given broad economic strength, the battle with inflation is not over and progress has slowed in recent months.^[16] The Fed has increased inflation and growth forecasts for 2024 while reiterating that they are fully committed to a 2% target.^[17] The road to 2% inflation will likely be bumpy, and the Fed can hold off on rate cuts until data confirms a clearer path.

In its March meeting, the Federal Reserve held interest rates steady and released updated interest rate expectations. The market cautiously expects a rate cut by June, and both the market and the Fed expect up to three interest cuts this year.^[18]

Source: https://www.nytimes.com/2024/03/20/business/fed-meeting-interest-rates.html

Since the last projections were released in December, the Fed now estimates one less rate cut in 2025 (no changes were made to its 2024 forecast).^[19] The new projections effectively slow the pace of expected rate cuts as inflationary forces remain and the economy remains on a more robust path.

Housing Market Insights

Evolving rate expectations impact borrowing costs and, ultimately, homebuyers.

The average borrower in America, as implied by the mortgage-backed securities market, has a mortgage rate of about 3.8%.^[20] Many of those borrowers are not looking to sell because they’d end up with a higher rate when purchasing a new property. On an average mortgage of around $450,000, the monthly payment with a 3% mortgage rate is $1,800, but at a 7% rate, it’s $3,000.^[21]

Source: https://www.freddiemac.com/pmms

Mortgage rates have retreated from their October peak, though they remain just below 7%, above levels from one year ago.^[22] America’s housing market has seen fewer transactions due to higher borrowing costs and tight housing inventory. The NAR reported that last year, existing home sales dropped by 19% in 2023 to the lowest activity level since 1995.^[23]

However, housing activity is showing a glimmer of activity. In February, existing home resales were up 9.5%, the largest monthly increase in a year.^[24] Median prices for new homes have retreated to a 2.5-year low,^[25] just as lower borrowing costs may be on the horizon. It may be a while before rates drop significantly though. Goldman Sachs expects mortgage rates to stay above 6% through 2025.^[26]

The good news for homebuyers is that a March antitrust settlement could provide some relief through lower housing transaction costs.^[27] This development comes after litigation against the National Association of Realtors (NAR) accused brokerages of inflating sales commissions. The settlement will likely change decades-old commission rules by making it easier for buyers to negotiate fees or use no agents at all.^[28] Estimates suggest homebuyers could soon save $12,500 in commission costs on a median-priced home worth $417,500.^[29]

Looking Ahead

The first quarter earnings season kicks off in April, and we will find out more about corporate profitability, which rose to an all-time high at the end of 2023.^[30]^,[31] Markets may also take a breather from the rousing start to the year.

We know that the headlines on Wall Street don’t always reflect the realities of Main Street when dealing with rising costs and waves of job turnover. The lack of affordability in the housing market is another signal of the challenges many Americans face.

We’re reminded that life events, as with the seasons, often move in cycles of transformation and renewal. Difficulties are often replaced with opportunities, and change is the only constant. Further, we know that the headlines and noise surrounding the upcoming election will only increase and understand if you become more concerned about the markets’ future trajectory. We are here to support you through it all– please don’t hesitate to reach out to us about any updates in your financial or personal life that may impact our planning with you.

As the green shoots of spring appear, may the seeds planted today blossom into growth tomorrow. We wish you a warm and joyful spring season!

Your Friends at JSF

The information expressed herein are those of JSF Financial, LLC, it does not necessarily reflect the views of NewEdge Securities, Inc. Neither JSF Financial LLC nor NewEdge Securities, Inc. gives tax or legal advice. All opinions are subject to change without notice. Neither the information provided, nor any opinion expressed constitutes a solicitation or recommendation for the purchase, sale or holding of any security. Investing involves risk, including possible loss of principal. Indexes are unmanaged and cannot be invested in directly.

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Asset Allocation and Diversification do not guarantee a profit or protect against a loss.

The Bloomberg Barclays U.S. Aggregate Bond Index measures the investment-grade U.S. dollar-denominated, fixed-rate taxable bond market and includes Treasury securities, government-related and corporate securities, mortgage-backed securities, asset-backed securities and commercial mortgage-backed securities.

The S&P 500 Index is an unmanaged, market value-weighted index of 500 stocks generally representative of the broad stock market.

TLT-iShares 20 Plus Year Treasury Bond ETF seeks to track the investment results of an index composed of US Treasury bonds with remaining maturities greater than twenty years.

The Nasdaq Composite is a market-capitalization-weighted index consisting of all Nasdaq Stock Exchange listed stocks that are not derivatives, preferred shares, funds, exchange-traded funds or debenture securities.

Treasury Bond- is a U.S. government debt security with a fixed interest rate and maturity between two and 10 years.

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[1] Why the Stock Market Rally May Have Even Further to Go – Bloomberg

[2] Gold takes a breather after record, Fed-fuelled rally | Reuters

[3] How the US stock market rocketed through the first quarter | Reuters

[4] S&P 500 closes at a fresh record, posts strongest first-quarter performance since 2019 | CNBC

[5] Rate Cuts: A Higher-for-Longer Good Friday From the Fed – Bloomberg

[6] Rising bond yields haven’t kept tech stocks from outperforming – and have created this buying opportunity, says BlackRock | Morningstar

[7] BII Global weekly commentary (blackrock.com)

[8] Wall St Week Ahead Investors eye Fed rate cut, earnings as key to sustaining market rally | Reuters

[9] The Magnificent 7 are no longer the only stocks driving S&P 500 to record highs | Morningstar

[10] How the US stock market rocketed through the first quarter | Reuters

[11] How the US stock market rocketed through the first quarter | Reuters

[12] US inflation moderating; consumer spending underpinning economy | Reuters