February 2024 Market Commentary – Podcast Episode 472
Key Take-aways:
- Market volatility has increased recently, with a likelihood of weakness in late February and March, which is a common seasonal trend.
- The “sell in May and go away” theory suggests that historically, the period from May through October offers lesser returns compared to November through April.
- February is typically the weakest month within the historically strong November-April period, and this pattern is consistent in February 2024.
- The January 2024 Consumer Price Index (CPI) showed a 3.1% year-over-year increase, which was higher than Wall Street expectations but continued a downward trend in inflation.
- The Federal Reserve, including Chairman Jay Powell, has indicated satisfaction with the direction of inflation but has no urgency to begin cutting interest rates due to concerns about reigniting inflation.
- The January 2024 Producer Price Index (PPI) rose at the fastest rate in five months, signaling that the Fed is not finished with its vigilance and rate adjustments.
- Any market pullbacks in the coming weeks are viewed as opportunities to invest, with no need for drastic changes in portfolios, according to Tom Mullooly.
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February 2024 Market Commentary – Podcast Episode 472 – Transcript
Welcome back to the podcast. I am Tom Mullooly, and this is episode number 472.
Episode four seventy-two of the Mullooly Asset Management podcast, welcome back.
I want to give a market message for February 2024.
We’ve had more volatility than we are used to seeing lately, and I want to talk about that in this episode.
There’s a strong probability of some weakness ahead in later February 2024, and into March.
It is usual and customary to see this kind of market slump at this time of year.
Many times we start the calendar year off very strong. We talked in a previous episode about the Santa Claus rally, about the first five days of January rally, and the January barometer. And how they can give us a good indication of what the year is going to look like.
Most years, sometimes all of these indicators are positive. In 2023, all three indicators were positive. And we were off to a very good start at this point in February of 2023.
Now here we are in February 2024. We are recording this on February 16th, 2024. We’ve seen the market move up. We’ve seen some more volatility though over the last week or two.
Before we get into the details of some of the economic numbers we’ve seen, I think it’s important to just remind our listeners about the “sell in May and go away” theory that tends to work historically. It doesn’t work every year, but it tends to work historically.
The idea, or the concept, is to sell in May and go away. What that indicates is that typically the months from May through October, that six-month window of time, historically has offered lesser returns on the Dow Jones and the S&P 500.
So if those are the weaker months, then that means the best months are the opposite period, and that is from November through the end of April. That’s usually the opposite corollary of the weak months; this is the best month period, so the period between November and April is typically a lot stronger than the returns we’ve seen historically from the May through October period.
Now, of the six months in the historically best month window of time, February 2024 is the weak link of the best six months. Markets tend to get a little sloppy and February 2024 is no exception. When you also combine the weak link feature of February 2024, with the fact that we’re also in the fourth year of a presidential cycle. Going back to 1950, the returns in the month of February are lukewarm at best, and sometimes they’re even down.
Important things to know just from historical yard markers.
Now earlier this week, on Tuesday, February 13th, the government released the consumer price index movement for the month of January. So the January CPI, the number came in at an increase of three-tenths of one percent. That was more than the market expected.
On a one-year, year-over-year basis, the consumer price index, the rate of inflation that most people use, is now 3.1%. This number for January, the year-over-year number 3.1%, is down from the rate posted in December. The year-over-year rate in December was 3.4%.
So inflation continues to trend lower. But market participants were looking for and really hoping for a number below three percent. They were looking for 2.9%, but they didn’t get it. On Tuesday, we saw the Dow Jones Industrial Average slice off five hundred and twenty-four points. This was really a massive move for a number that was pretty much in line with what the Fed was expecting.
The trend continues to remain good. The trend in inflation continues to go lower. But it just wasn’t the number that Wall Street “magicians” were looking for.
Jay Powell, chairman of the Federal Reserve, and other Fed governors, have said – over and over – that they like the trend, and they said that again on Wednesday and on Thursday of this week.
They like the trend, the direction, that inflation is going. They feel like they’re making great progress, and that there was nothing wrong with this CPI print for the month of January.
So the Dow Jones sold off five hundred and twenty-four points on Tuesday, and we saw the Dow Jones essentially recover those same five hundred points between Wednesday and Thursday of this week. Then today, Friday, we saw the producer price index numbers for January come out. We’ll get to that in a moment.
But again, Wall Street is extremely impatient; don’t ever forget that. You’ve probably seen a stock – or even a bond that you own, when there is bad news, the price tends to reflect that bad news immediately.
We’ve also seen it work in the opposite way: when there is good news in a stock; a stock will close at say fifty dollars. If they have great news, the stock will open significantly higher. You couldn’t even buy it in between where it closed and where it opened the next day.
Wall Street is very impatient, and it’s easy to get sucked into the news cycle like this. But don’t let that swing your investment decisions around. As we have been saying for now at least six months in podcasts, in client meetings, in videos, the Fed sees no urgency to begin cutting rates. But this is what Wall Street wants.
They want to see the Fed lowering rates.
As we mentioned on the previous podcast episode, if the Fed were to begin cutting rates, it could actually foster some additional inflation. The Fed wants to be very cautious about lowering rates.
In the late seventies, Paul Volcker, as Fed chairman, raised rates because we had increasing inflation.
That triggered the recession that we saw in 1979, due to higher oil prices. The truth is we had a lot of inflation in the system, not just in oil prices.
But by late 1979 and going into 1980, Volcker and the Fed felt it was okay to back off the rate hikes. And they actually started cutting rates.
What happened with that?
We saw a return of inflation.
In fact, inflation went higher than it was in 1979. And so now Volcker was at the point where he had to raise rates above the rate of inflation. That is the only way that you’re going to get inflation to cool off. You’ve got to raise your short-term borrowing rates above the rate of inflation.
Well, at the time, we saw inflation in nineteen eighty reach thirteen percent. And short-term interest rates set by the Federal Reserve, the fed funds rate, got to fourteen percent in 1980. And if anybody listening to this was around at that time, you saw mortgages at 17% and 18%. You saw CDs, short-term rates at 18%, 19%.
My father even came home one day with a rate of twenty percent on a short-term CD from Marine Midland Bank.
This is exactly what Jay Powell and the rest of the Fed board is concerned about: if they start cutting rates, they’re going to get a return of inflation. So they are going to slow-roll these rate cuts.
They don’t want to be in a situation where they have to reverse course and raise rates again.
True to form, Friday morning, this morning, February 16th, we received the January producer price index, the PPI number for January. Which is a number that the Federal Reserve also relies on as an indicator. Because the producer price index — think about what the name implies — is the cost that manufacturers and producers have. So the raw materials cost.
These wholesale kinds of costs rose, according to the numbers we got this morning, at the fastest rate we’ve seen in the last five months.
It’s very clear to us, here at the firm, and also to many who are now taking the lampshade off their head on Wall Street, that the Fed is not done yet. They still have to remain vigilant in watching the indicators before they start cutting rates.
They do not want to be premature in cutting rates. Because if the Fed cuts rates, it tends to spur the economy into further growth. So let’s just think about this.
A few months down the road, if we have a Fed that is cutting rates, there’s more potential for growth. Which means more potential for additional inflation. This is not what the Fed wants.
I’m coming to the conclusion, while there are some market strategists out there who believe the Fed is going to need to cut rates three, four, five times in 2024.
I don’t see that happening at all.
In fact, I think the Fed may cut rates once this year, and there’s a possibility that they may not cut rates at all this year in 2024.
As we mentioned on the previous episode, we’re bumping into presidential election season. The Fed typically likes to sit that out. The only time that they tinkered with interest rates during a presidential cycle… the only time going all the way back to 1913, was in 2008. And by that point, it was really too late for them to do anything.
The CPI is the consumer price index, is the headline number (for inflation). But one of the big numbers that the Fed watches, in addition to that, is the producer price index, which we got this morning, the PPI for January.
So inflation hits the wholesalers, the manufacturers, first. And then that tends to trickle over into the consumers at a later date. So you’re producing something in January, February 2024; it doesn’t hit the shelves for a while, and you’re going to see (maybe) not increased inflation. But certainly, it’s going to take a while for inflation to come down.
We’re at this point where we see January was a healthy month in terms of returns for the market. But there’s a strong possibility we’re going to see some weakness in late February and probably into and through March. We’ve got historical data that lines up with this.
This typically tends to happen, this weakness that we see, in mid to late February 2024 and then into March. This typically happens right before the rally resumes. And so very similar to what we saw last year in 2023, where we had a year where most of the market, the S&P 500, was up about fourteen or fifteen percent in July. Then we went into a slump, chopped off about half of that return in September and October. But we finished the year up over twenty percent.
I’m not saying we’re going to get twenty percent returns in 2024. Let me be clear about that.
But I think we’ll see a somewhat similar pattern as we go through the spring. February 2024 weakness, March sloppiness, and then the rest of the year looks to be pretty okay. Not a big surprise if we see the market pause here or even go down a little bit.
I don’t believe this is going to be any kind of serious or damaging pullback, but I think we can certainly stall around here.
Also, when we make new highs, like we have been recently the last few weeks with the markets, whether it’s the Dow Jones or the S&P or even the NASDAQ. These market tops tend to be a lengthy process. It’s very unusual for the market to make a new high and immediately start drawing down on it.
This process of making new highs, or staying close to new highs, may only just be the beginning.
So right now, outside of any kind of world events going on, it seems like the talk of Fed rate cuts is on everyone’s mind and seems to be a driver of stocks.
We just don’t know when that’s going to happen. And as I had just mentioned a moment ago, there’s a growing possibility that the Fed may not cut rates at all in 2024.
As a result, we may see multiple rate cuts in 2025. It’s hard to say at this point. I think the folks that are out there, projecting three, four, five rate cuts, I don’t know where they’re getting that information from.
What does that mean for you and I? Any kind of pullback that we get in the market in February 2024, and March 2024 is going to be a terrific opportunity to put more money to work, and you should be prepared to do that over the next six to eight weeks. It’s a good time to be putting money into the market.
Otherwise, other indicators all seem to be looking very friendly in the sense that this is a good opportunity, a good backdrop, to be putting money to work. I don’t see any need for drastic changes in our portfolios.
So we appreciate you listening. This has been episode number four seventy-two of the Mullooly Asset Management podcast. Talk to you again soon.
Tom Mullooly is an investment advisor representative with Mullooly Asset Management. All opinions expressed by Tom and his podcast guests are solely their own opinions and do not necessarily reflect the opinions of Mullooly Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions.
Clients of Mullooly Asset Management may maintain positions in securities discussed in this podcast.
