March Madness = Market Madness?
Doug Walters
As we enter the madness that is March, we ponder how investors should be thinking about this rather impressive equity rally.
Contributed by Doug Walters , David Lemire , Max Berkovich , Eh Ka Paw
March Madness is upon us. Yes – I am referring to the college basketball extravaganza, but you’d be forgiven for thinking this was a reference to market commentary. After all, it’s been another incredible month for US stocks in March. We increasingly hear investors question the merits of the current rally, so let’s discuss if it is justified or madness.
This week, the S&P 500 hit a fresh new high. This isn’t news. A healthy market, by definition, should regularly be hitting new highs. That’s why we invest in them. Of course, they don’t always go up. Just ask Japan. Their stock market also hit fresh highs this month, but the last time they were at these levels was in the 1980’s. Yikes! That is a genuinely noteworthy new high and a reminder to investors that positive returns are far from guaranteed.
As I type, the stock market is up about 28% from the October lows. So, while “new highs” are not noteworthy, this rally certainly has been. Is this market madness, or is the run-up justified?
As evidence-based investors, we are the first to admit that we do not know where the stock market goes from here (at least in the short term). Anyone who says otherwise is kidding themselves. But that does not mean investors are flying blind. There is evidence that this rally is justified:
- Artificial intelligence is driving a massive technology investment cycle. Those are real dollars going into profitable companies.
- Earnings growth is strong. Analysts expect 11% growth this year, and very early in this earnings season, nearly all companies are surprising to the upside.
So, there may be fundamental support for this rally. However, as evidence-based investors, we gravitate toward additional considerations – namely, Momentum. Of the market factors we look at (like Value, Quality, and Small Size), Momentum is the most persistent. The idea is simple: investments going up tend to continue to go up, and there are mountains of academic support for why this is (primarily behavioral factors like herd mentality, FOMO, etc.). In addition, our research shows that Momentum works best during economic expansions, and indications are that we are solidly there now despite recent fears of a Fed-induced hard landing. For these reasons, we generally opted to overweight Momentum in our well-diversified strategies.
Is the continuation of the rally a sure thing? Of course not. But economic expansions and the associated market rallies drive the lion’s share of positive returns that long-term patient investors enjoy. Trying to time an exit from these rallies is tricky without a crystal ball. There will be a time when the evidence points to other opportunities, but for now, we’re happy to enjoy the “madness” of this latest leg up in equities.
An impressive rally
As we type, the S&P 500 is up over 28% from the October lows. Enjoy the “madness!”
Headline of the Week
Bank On It!
Several central banks had rate decisions this week. While two perennial giants, the Bank of England and the Federal Reserve (Fed), did not cut rates as expected, the Swiss National Bank (SNB) did, and the Bank of Japan (BOJ) exited its negative rate policy after 17 years.
SNB was the first major Central Bank to cut rates in 2024 as a measure to play defense for the Swiss Franc, and with inflation below 2%, it was an opportune time for a tip-off.
The BOJ not only ended its negative rate policy, but it also ended its yield curve control framework, which kept the 10-year bonds at a 0% interest rate. Japan was the last of the major central banks with negative rates, so there’s that!
The Fed did not cut rates, but Chairman Powell did help fuel market euphoria when he hinted that rates have peaked and easing will commence at some point this year. The “dots,” which are the projections from the policy-setting committee, indicate the decision-makers are penciling in three cuts in 2024 and are getting more comfortable with reaching its inflation target of 2%.
The Fed intends to slow the balance sheet shrinking “fairly soon” in hopes of smoothing out market dislocations this creates and avoiding unintended liquidity crunches that drained bank reserves in 2017-2019. The balance sheet was $9 Trillion in 2022, so $1.5 Trillion has already run off.
The Week Ahead
After a week full of central bank meetings both at home and abroad, we shift focus back to the economy and inflation at home.
At the Buzzer
The personal consumption expenditures index (PCE) report on Friday will come in as the market is closed for Good Friday. How appropriate to end the quarter with an inflation print!
- PCE is the preferred inflation gauge for the Federal Reserve.
- Expectations are that inflation will remain sticky, but it will be a nail-biter on Friday on how sticky it was in February.
- Current predictions are that the core number, which excludes food and energy, will remain steady at 2.8% annualized, with prices rising 0.4% from January.
- Also on the docket next week are durable good order and the consumer confidence reports.
- Current market-implied odds are that the European Central Bank, Bank of England, Bank of Canada, and the Federal Reserve will all cut rates in June, but upsets are known to happen.
Like the NIT
With the inflation report being the primary market driver next week, the final revision of the Gross Domestic Product (GDP) for both the U.S. and Great Britain feels like the other tournament.
- Expectations are for no change in the final number for both countries.
- However, March is notorious for surprise upsets.
- The previous reads for the GDP of the United Kingdom had been negative. While that should be the base case, any further downgrade in the final number will shake up the field.
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