Market Review 02/2024

Equity indices continue their victory march: in February, the S&P 500 rose by 5.17% (+6.84% YTD), breaking the 5000-point mark without any apparent problems. The Dow Jones Industrial Average added 2.22% (+3.47% YTD), the Nasdaq 100 was up 5.29% (+7.24% YTD) and even the Russel 2000 joined the party, adding 5.52% (+1.37% YTD). In the last month of winter, Nvidia (+26.03%), Meta (+22.64%) and Amazon (+11.17%) contributed the most to the S&P 500 and Nasdaq 100 gains, while Apple (-3.75%), Alphabet (-8.58%), Adobe (-10.78%) and Amgen (-12.28%) shares were feeling rather shaky.

Nvidia and Meta break records

The reporting season is almost over: 489 companies in the S&P 500 have already had their figures for Q4 2023 presented. The overall surprise relative to analysts’ expectations was 1.22% for sales and 7.29% for earnings figures. One could say that the past quarter was the second consecutive quarter of profitability growth. However, in one of our previous writings we noted that analysts were actively revising their expectations in the prospect of an imminent recession, which (so far) has not arrived. So, considering the already lowered expectations, the true magnitude of the surprise was rather modest.

The growth dynamics of the so-called Magnificent Seven contributed greatly to the overall performance of the S&P 500. For example, Nvidia’s sales figures for the reported quarter amounted to $22.1 billion, while the company’s capitalization increased by a record $277 billion after the news, which was the largest increase in Wall Street history (the previous record of $196 billion was also set very recently – on February 2, 2024 by Meta).

European and US equity markets

One step forward, two steps back In February, U.S. manufacturing experienced a further decline, with the ISM’s manufacturing Purchasing Managers’ Index dropping to 47.8 from January’s 49.1, marking it the 16th consecutive month the PMI has remained below the 50 mark. This indicates the ongoing contraction in the manufacturing sector, which constitutes 10.3% of the U.S. economy. The ISM survey’s forward-looking new orders sub-index also declined to 49.2 after briefly rebounding to 52.5 in January. Additionally, the growth in the U.S. services sector slowed slightly in February, with the ISM reporting a decrease in its non-manufacturing PMI from 53.4 to 52.6.

Due to sluggish demand manufacturing activity continued to decline in Eurozone, too. HCOB’s final Eurozone manufacturing PMI decreased slightly to 46.5, while factories reduced their workforce for the ninth consecutive month. However, there were signs of improvement in business activity during February, with the services industry expanding for the first time since July. The services PMI rose to 50.2 in February from 48.4 in January. On another note, inflation decreased further in February, with the annual figure expected to be 2.6%, down from 2.8% in January, according to a flash estimate from Eurostat.

China’s manufacturing activity continued to decline for the fifth consecutive month, increasing pressure on Beijing to implement additional stimulus measures. The official manufacturing PMI, compiled by the National Bureau of Statistics, decreased slightly to 49.1, however, a survey conducted by Caixin/S&P Global, indicated steady expansion in manufacturing activity, with both production and new orders growing at a faster rate. The Caixin manufacturing PMI stood at 50.9 in February, only marginally higher than the January reading. Additionally, the services sector experienced growth in February, although at a slower pace compared to the previous month – the Caixin Services PMI came at 52.5 (52.7 in January).

Gold price, USD/oz

Gold at all-time highs

FX market remained calm, not giving us much of an action. Dollar tried to go higher for most part of the month, though not changing the broader picture. Precious metals, though, finally seem to be back in play – gold, after dropping below 1,990 dollars per troy ounce was quick to turn around and now is trading at all-time highs above XAU/USD 2100. Now we will definitely not advice reducing long positions in the metal, with XAU/USD 1970 being the new initial warning sign for the bulls. If the recent breakout proves to be valid, then prices should take us all the way to 2,400 dollars per troy ounce levels. Silver still trades in boring ranges, but it might start putting pressure on an all-important resistance levels of XAG/USD 25-26. Ideally, any dips now must be contained just above 22 dollars per troy ounce and when we see silver above XAG/USD 25 mark, it might signal that larger bull move is just a question of time.

Benchmark 10-year bond yields

Rate cuts are postponed again

Treasury yields behaved in line with our expectations. The economic data, although not encouraging, showed a decline in inflation and the continuing low unemployment rate, which may have confirmed the market in the opinion that the economy is not as weak as many think, and rate cuts by the Fed will come in later than initially expected. The minutes of the January meeting of the Federal Open Market Committee, published near the end of February, only confirmed this. As a result, the expectations for the first rate cut moved from March to May, while zero-coupon market is not expecting a rate cut until June of this year. Logically, we saw some profit taking in the 10-year Treasuries as well, causing their yields to rise to 4.25-4.30% levels. As we noted in our previous publications, buying 10-year Treasuries at 4.30-4.50% yield levels looks attractive.

High Yield bond Indexes

Speculators are leaning toward a correction

Statistics on mutual funds and ETFs compiled by the Investment Company Institute indicate continued inflows into stock and bond funds, as well as money market funds. Interestingly, since the beginning of the year, despite the rise in the S&P 500 Index, the difference in open speculative long and short positions in futures contracts (positions that are not hedges) has continued to increase in the negative direction, meaning that bearish sentiment has become more prevalent in the market. As of February 27, the difference was 224,000 contracts in favor of the bears. On the one hand, closing short positions may provoke another market rally, on the other hand, if the opening of short positions continues, it may put pressure on further growth of the index. Opening long positions at current S&P 500 levels is still very risky, in our opinion.