01.03.2024 Four Winning Months. More To Come For Stocks?

Stock indexes have just wrapped up their fourth winning month. It’s the best February since 2015 for the S&P 500 and Nasdaq, which both closed at new record highs yesterday as well.

The biggest and most obvious threat to the current rally is Federal Reserve policy expectations, which have already been pulled back significantly this year, though stock markets have hardly registered the shift. This is a key reason why many Wall Street insiders are nervous about upcoming February data and the possibility that it underpins January data showing that the US economy is heating up again.

On the positive front, the PCE Prices Index released yesterday came in as expected, with “core” January inflation – which strips out food and energy and is a preferred Fed inflation gauge – slowing to +2.8% year-over-year from +2.9% previously and versus the Fed’s target rate of +2.0%.

Bulls point out that Fed Chief Jerome Powell and other officials have stated that while they want to see more evidence that inflation is on a sustainable path toward that goal before cutting rates, those cuts will ideally begin before the +2% target is reached.

Bottom line, bulls believe data is still supportive of at minimum three-25 basis point Fed rate cuts starting as early as June. The ISM Manufacturing Index today will provide the first look at highly anticipated February data. Investors will be paying particularly close attention to the “prices paid” component, which surged nearly +8% in January, the first time raw materials prices have risen since April 2023.

Wholesale prices can be a leading indicator of consumer goods inflation, which has come down considerably and even shown signs of “deflation” in certain pockets. The persistent, or “sticky,” inflation problem has been on the services side of the economy and driven primarily by housing prices that continue creeping higher. Meaning if goods prices start to increase, it would at best work to keep inflation stuck at current levels, and at worst quickly start to erase progress made so far in the inflation battle.

Data to watch

A slew of data next week will help to further shape investor sentiment regarding Fed policy, including the ISM Non-Manufacturing Index on Tuesday, which will provide an update on February services inflation.

The top data highlight next week is the February Employment Report on Friday.

Remember, the January report showed over +350,000 jobs added and a surge in average hourly wages, which was considered too “hot” to be compatible with near-term Fed rate cuts and basically killed most hopes that rate cuts might begin in March.

Other key jobs data next week includes the Job Openings and Labor Turnover Report (JOLTS) and ADP’s Employment Change on Wednesday, and Productivity and Costs on Thursday.

Next week also brings Fed Chair Powells semi-annual testimony before Congress. He’ll appear before the House Financial Services Committee on Wednesday, March 6, and to the Senate Banking Committee on Thursday, March 7.

Investors will no doubt be tuning in for clues regarding the Fed’s current thinking.

On the earnings front, Q4 2023 results are mostly wrapped up with companies in the S&P 500 reporting average growth of +4.0% and 73% of companies topping analyst estimates, according to FactSet.

There are still some important results left to come, though, including several key retailers. CrowdStrike, Ross Stores, and Target report on Tuesday; Abercrombie & Fitch, Campbell Soup, Foot Locker, and Thor Industries on Wednesday; American Eagle Outfitters, Broadcom, Costco, The Gap, Kroger, Marvell Technology, and Toro on Thursday; and The Buckle on Friday.

Four Winning Months. More To Come For Stocks?

Wishing you a great week!