Good morning!
After January’s mixed results for U.S. stocks (the S&P 500 and Nasdaq posted gains, but small-cap stocks and the S&P 500 equal-weighted index lost value), February’s results were quite strong across the board (with the S&P 500, Nasdaq, Russell 2000, and the S&P 500 equal-weighted index up by 5.3%, 6.2%, 5.6% and 3.9%, respectively). The S&P 500 has now advanced for 4 straight months, and on February 9th it breached the 5,000 mark for the first time—while the tech-heavy Nasdaq set a record for the first time in more than 2 years. These widespread (and significant) gains occurred despite a shift in market expectations for a Fed interest rate cut (pushed out from March into June) and an increase in the 10yr Treasury yield to 4.25% from 3.97% at the end of January 2024.
Major US Indices February Results
Sector and Individual Stock Performance
Unlike January, when 6 of 11 sectors posted negative returns, all S&P 500 sectors advanced in February. Consumer Discretionary and Industrial shares were the market leaders, advancing 8.7% and 7.2%, respectively, while the laggards were Consumer Staples and Utilities, with advances of only 2.3% and 1.1%.
Among individual stocks, Nvidia stole the show, advancing 28.7% during the month. (After its February 21 earnings report, it added a staggering $275 billion in market value, for a current market cap of over $2 trillion.) During February its market capitalization surpassed that of both Alphabet and Amazon. Less well covered but still significant, Allison Transmission (featured in November) and MasterBrand (featured in September) advance by 24% and 23% respectively for the month following strong earnings reports.
What Could Stop the Rally?
It’s nearly impossible to predict what will make the stock market go up or down over a given period, but several things could derail the rally, from concerns over the upcoming presidential election to a slower decrease in interest rates than anticipated or an escalation in geopolitical tensions in the Middle East or Eastern Europe. However, as we saw with COVID-19 and the Great Financial Crisis, the things that end up derailing market rallies are usually what the late Donald Rumsfeld called the “unknown unknowns.”
Signs of Speculative Excess
Certain pockets of the financial markets do concern us and are worth monitoring for signs of speculative excess. Emerging market distressed debt, for example, has advanced by 25% since its October lows—and in the words of Michael Hartnett, chief investment strategist at Bank of America Global Research, “When people want to play safe, they don’t buy emerging market distressed debt. Nigeria and Argentina aren’t the places to be—but they are now.”
Why are investors embracing the riskiest parts of the financial markets? According to Yun Li of CNBC, “[t]he conventional wisdom today that’s driving investors to some of the riskiest parts of the market goes like this: inflation will fall to the central bank’s 2% target, while the economy will avoid a recession before a series of rate cuts arrive.” Currently the market is pricing in a soft landing—but if that narrative shifts, the riskiest area of the market could be in trouble.
Emerging market debt is far from the only place with froth, however: in its 6th straight month of gains, Bitcoin advanced 45% in February, passing the $60,000 mark, and SPACs have joined the party, with 33 pending in the first 2 months of 2024 (more than in all of 2023 combined).
Should Four Straight Months of Gains Worry Investors?
With the S&P 500 having advanced for 4 straight months now (putting it up over 20% since November), should investors be concerned? According to Steve Starker of BTIG, since 1930 the market has seen 4 straight months of gains from November through February on 16 different occasions, and each time it ended the full year positive (up an average of 18%). The S&P 500 started 2024 trading at 19.6x forward earnings and is now trading at 20.5x—a multiple that is certainly far from cheap but that isn’t blatantly overvalued by historical standards.
From this Week:
Have a great Sunday!
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Important Information: Performance Information. Past performance does not guarantee future results. The reports in this sample are for informational purposes only and the performance of the stocks selected is not indicative of the performance of all the stocks profiled in Boyar Research. The performance of the stocks selected and the performance of the stocks in Boyar Research may in fact diverge materially. Additional information regarding the performance of other companies featured in Boyar Research is available from Boyar Research upon request. This information is not a recommendation, or an offer to sell, or a solicitation of any offer to buy, an interest in any security, including an interest in any investment vehicle managed or advised by affiliates of Boyar Research. Any information that may be considered advice concerning a federal tax issue is not intended to be used, and cannot be used, for the purposes of (i) avoiding penalties imposed under the United States Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter discussed herein. Clients of an affiliate of Boyar Research and employees of Boyar Research own shares in Nvidea, Allison Transmission, and Master Brand.