Authored by :
Michael G. Dow, CAIA, CFA, CPA, Chief Investment Officer
Julien R. Frazzo, Director of Risk Management and Securities Research

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The Quick Facts

• The Nasdaq 100 led the way with a 5.4% gain in February, while the S&P 500 was up 5.3%.
• The S&P 500 broke 14 record-highs this year and posted a fourth straight monthly win.
• The rally broadened, with small caps slightly outpacing their large-cap counterparts, with the Russell 2000 up 5.7%.
• Nvidia achieved a remarkable milestone by adding $277 billion of market capitalization in a single day, the largest one-day gain ever recorded on Wall Street.
• Markets are now pricing that the Federal Reserve (“Fed”) will start cutting rates at its June meeting.
• However, some economists are making the bold prediction that the Fed will not cut rates in 2024.

Markets shook off concerns over inflation and the Fed’s rate trajectory with more record highs in February. The Nasdaq 100 led the way with a 5.4% gain in February, while the S&P 500 was up 5.3%. The rally broadened, with small caps slightly outpacing their large-cap counterparts, with the Russell 2000 up 5.7%. Emerging Markets, as measured by the MSCI Emerging Market Index, joined the party and were up 4.8% in February, but they remain down 0.1% YTD.

AI powerhouse Nvidia achieved a remarkable milestone by adding $277 billion of market capitalization in a single day following the announcement of its quarterly results. This was the largest one-day gain ever recorded on Wall Street, eclipsing Meta’s $197 billion record, and equivalent to the entire market capitalization of Chevron or Bank of America.

The U.S. economy keeps defying expectations of a recession, growing at a stronger-than-expected pace in 2023 (2.5%) and with growth expectations continuing to be revised higher. The labor market remains robust, with the unemployment rate below 4% for more than two consecutive years. The U.S. economy is simply not slowing down, and the Fed pivot has provided a strong tailwind to growth since December 2023, notably easing financing conditions.

February Asset Class Performance

At the sector level, all 11 sectors gained for February, compared with 5 for January and 10 in December.  Consumer Discretionary (+7.9%) and Industrials (+7.2%) led the way, with Utilities (+1.1%) lagging. Year-to-date, Communication Services (+9.2%) is leading the way, followed by Technology (+7.5%) and Financials (+7.3%). Only two sectors are down year-to-date: Utilities (-1.9%) and Real Estate (-2.4%).

Large-cap Growth outperformed Large-Cap Value stocks by 3.1% in February, bringing the YTD outperformance to an impressive 5.7%, despite higher risk-free rates. Over the last three years, the total return of the Large-cap Value index has lagged behind the Large-cap Growth index by 14.1%. The Russell 2000 Index – the world’s most closely followed gauge of smaller companies – was up 5.7% in February, a sign of the broadening of the equity rally. The ESG segment of the market, as measured by the MSCI USA ESG Select Index, was up 4.8% in February, 0.6% less than the S&P 500. Over the last three years, the ESG index is up 29.1% and 7.7% behind the S&P 500 on a total return basis. Emerging markets equities also had a strong February, up 4.8%. They remain down year-to-date and well behind U.S. and EAFE (Europe, Australasia, and the Far East) equity returns over the last 1 and 3 years.

Markets are now pricing that the Fed will start cutting rates at its June meeting. Current pricing for future contracts estimating the outcome of future Fed cuts now anticipates three 25 basis-point rate cuts this year, in line with the Fed’s own median projections. The January CPI report posted a 0.3% increase, when a 0.2% rise was expected, as the year-over-year rate was 3.1%, down from December’s 3.4% but higher than the 3.0% that was hoped for. Core CPI was up 0.4% (0.3% in December) and the year-over-year rate was flat at 3.9%. With the U.S. economy surprising to the upside, some economists are making the bold prediction that the Fed will not cut rates in 2024. For instance, Apollo Global Management Chief Economist Torsten Slok believes that a re-accelerating U.S. economy, coupled with a rise in underlying inflation, will prevent the Fed from cutting interest rates in 2024. Slok’s comments come after the release of the Fed’s preferred inflation metric, core PCE (core personal consumption expenditures price index), showed an increase of 0.4% in January, the fastest pace in nearly a year.

Treasuries continued to experience overall weakness in February. The 10-year U.S. Treasury closed at 4.25% vs. 3.91% at the end of January, 3.88% at the end of December 2023, and from a peak of 5.0% in October 2023. Shorter-term 2-year U.S. Treasury closed 41 basis points higher on the month at 4.62%, vs. 4.21% at the end of January and 4.25% at the end of 2023. The 2y x 10y yield curve remains inverted by 37 basis points at the end of February. The U.S. Aggregate bond index retrenched 1.4% in February, while the Municipal Bond Index closed February up 0.1%.

Oil futures, as measured by the WTI Crude Oil $/bbl., were up 3.2% in February to $78.bbl. Gold spot was up 0.2% in February but down 0.9% year-to-date, closing at $2,044 per troy ounce. The U.S. Dollar Index, which indicates the general international value of the U.S. Dollar, further strengthened, with the DXY rising by 0.9% in February, after a 1.9% gain in January. A weaker dollar is generally good news for equity markets and commodities, just as a strong one tends to hold back stocks and other risky investments. Digital asset valuations were up significantly in February. Bitcoin’s value surged 44.7% in February, reaching heights not seen since 2021. This surge was primarily driven by massive demand for Bitcoin ETFs. The approval of several spot Bitcoin ETFs by the SEC (Securities and Exchange Commission) led to billions of inflows within weeks.

Interest rate volatility has been constant since the Fed began its rate-hiking cycle in 2022. While equity investors focus on the well-known CBOE Volatility Index (“VIX”), bond investors pay attention to the less well-known ICE BofA MOVE (“MOVE”) Index, which measures bond market volatility. The MOVE Index closed February at 109, trading as low as 106 and as high as 116, down from 140 in October 2023. It remains elevated compared to historical averages, which reflects the uncertain rate environment. The VIX remains low, closing at 13.4, after trading as high as 17.9 and as low as 12.7, down from 14.5 last month.

Chart of the Month – Inflation Adjusted Value of $100,000 in 2023 and for the Last 30 Years

With money market savings accounts yielding 5%, it is tempting to stay in cash to protect capital from a potential recession. The illusion lies in assuming that cash is risk-free. In reality, cash carries risks related to inflation, opportunity cost, and interest rate changes.

One of the primary concerns with holding cash is the risk of inflation eroding its purchasing power over time.  When inflation occurs, the value of cash decreases, meaning that the same amount of money can buy fewer goods and services in the future. Therefore, while cash may seem safe in the short term, its long-term value may be compromised.

Holding cash means forgoing potential investment opportunities that could generate higher returns. In a low-interest-rate environment, cash held in savings accounts or low-yield investments may not keep pace with inflation, resulting in a loss of purchasing power over time. By contrast, investing in assets such as stocks, bonds, or real estate may offer greater potential for growth, albeit with varying levels of risk.

Cash is often prized for its liquidity, meaning it can be readily converted into goods, services, or other assets. However, prioritizing liquidity over potential investment returns may limit wealth accumulation over the long term. Finding the right balance between liquidity and returns is crucial for effective financial planning and risk management.

While holding cash can provide a sense of security and liquidity, it is essential to recognize the potential drawbacks and limitations associated with this approach. By understanding the trade-offs involved and adopting a balanced investment strategy, investors can better navigate the tension between the perceived safety of cash and the pursuit of long-term financial goals.

Quote of the Month

“Cash is not a retirement asset. It is a purchasing power enzyme.” – Michael Dow, CFA, CAIA, your Chief Investment Officer at Beacon Pointe.

Major Asset Class Dashboard

RELATED LINKS

Macro & Markets: February 2024 – An Update from Chief Investment Officer, Michael G. Dow

Beacon ‘Pointe of View’ – A Market Update February 2024

Important Disclosure: The information contained in this article is for general informational purposes only. Opinions referenced are as of the publication date and may be modified due to changes in the market or economic conditions and may not necessarily come to pass. Forward-looking statements cannot be guaranteed. Past performance is not a guarantee of future results. Beacon Pointe has exercised all reasonable professional care in preparing this information. The information has been obtained from sources we believe to be reliable; however, Beacon Pointe has not independently verified or attested to the accuracy or authenticity of the information. The discussions, outlook, and viewpoints featured are not intended to be investment advice and do not consider specific investment objectives or risk tolerance you may have. All investments involve risks, including the loss of principal. Consult your financial professional for guidance specific to your circumstances. 

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