Investment Update February 6, 2024

Last Week on Wall Street

Economic data for the week included the Federal Reserve keeping interest rates unchanged, as expected. ISM manufacturing data improved, while the employment situation report for January came in far stronger than expected.

Equities fared well in the U.S. especially, with continued better-than-expected earnings. Bonds gained as long-term yields fell back. Commodities overall declined, led by a lower risk premium in crude oil prices.

U.S. stocks were mixed until Wednesday, when the FOMC statement and post-meeting press conference alluded to lower chances of a March rate cut—contrary to market hopes for a sooner-than-later ease. Faster easing has been the growing narrative this year, despite continued strong economic data (and especially considering very strong labor data on Fri.).

All-in-all, large caps again experienced a positive week, again led by a narrow band of growth stocks during the busiest earnings week of the quarter. By sector, consumer discretionary and communications stocks led with strong weekly gains, while energy lagged, as the only declining group. Real estate also fell back a fraction of a percent, despite declines in long-term yields. In a high-volume earnings week, tech companies in focus showed mixed results, with Microsoft little changed despite optimism in the AI and cloud space, and Alphabet suffering weaker advertising sales growth. Interestingly, in addition to decent earnings results Meta began a dividend program, not necessarily a common feature in the tech space, leading to a 20% gain on the week. Amazon gains of 8% led the consumer discretionary sector.

Foreign stocks were mixed, with gains in Japan based on strong earnings were offset by minor declines in Europe and the U.K. The Bank of England kept interest rates steady, but alluded to eventual cuts, in line with other key central banks. Emerging markets also declined as Chinese markets fell more than -5%, with subdued economic data, led by manufacturing PMI remaining in contraction, although improving from the prior month. Real estate market data remained negative, as a Hong Kong court ordered Evergrande be liquidated, with debt estimates high enough to be of financial stability concern.

In fixed income, government and investment-grade corporate bonds saw gains, outperforming high yield and bank loans, which were little changed. Foreign emerging market bonds gained along with risk assets. Long-term Treasury yields fell sharply last week, some of which may have been related to New York Community Bank earnings news. This pointed to some continued stress in regional bank commercial loan portfolios, albeit quite idiosyncratic from bank to bank.

Commodities fell across the board, with the exception of precious metals, which saw minor gains, led by declines in energy. Crude oil prices fell over -7% last week to $72/barrel, due to word from Qatar about a possible Israel-Gaza ceasefire agreement—which would remove a significant potential source of geopolitical risk.

Fact of the Week

2023 was a historic year for bank failures with 5 banks going under, including Citizens Bank (IA), Heartland Tri-State Bank (KS), First Republic Bank (CA), Signature Bank (NY), and Silicon Valley Bank (CA). The combined $548.7 billion in assets from these 5 institutions outpaces the 25 2008 failures with a combined asset value of $373.6 billion (source: FDIC).