Inflation Hiccup Creates a Bit of Market Drama, but Not Much
The financial markets weren’t entirely free from drama in February, but overall things remain quite calm as we enter the final month of the new year’s first quarter. The “drama,” such as it was, stemmed from a slowdown in falling inflation, which prompted the Federal Reserve to back off slightly on their commitment to start lowering short-term interest rates sometime this year.
Although the Fed says they still intend to start bringing rates down again after raising them at a historically aggressive pace for a year-and-a-half, Chairman Jerome Powell said in a statement the reversal won’t happen until they have “gained greater confidence that inflation is moving sustainably toward 2%.” 1
Two percent has always been the Fed’s official target for the inflation rate, and they are certainly much closer to that target now than they were a year ago when inflation was still over 6%. But last month, inflation numbers for January came in at 3.1%, slightly higher than the 2.9% rate economists were expecting. 2 The news sparked a knee-jerk selloff on Wall Street and sent longterm interest rates trending upward. The interest rate on the 10-year government bond started February at 3.87% and ended the month at 4.25%.3
Minimal Impact
How did this bit of drama affect everyday investors, and your portfolios specifically? The answer is, not much. Despite that kneejerk selloff I mentioned, the S&P 500 and the Nasdaq both ultimately hit new record highs again last month and enjoyed their best February performance in nearly a decade.4 Overall, the stock market remains up by over 6% for the year.
Yes, much of the market’s strength is still being driven by the artificial intelligence tech rally that took off last year. But beyond that, investors also seem generally optimistic about the economy based on the latest data (which is mostly strong), especially knowing that the Fed is ready and willing to lower interest rates again if the economy starts heading south.
Even the stickier-than-expected inflation numbers for January are essentially a sign of economic strength since they mean demand is high and consumers are spending. As a result, GDP growth for Q4 2023 was an estimated 3.2%.5 That was down from the third quarter’s 4.9% figure, but still indicative of a healthy, growing economy – and the latest employment numbers indicate the same thing.
As for that spike in long-term interest rates in February, even that had a minimal impact on most investors, as evidenced by our portfolios. As you’ll see on your latest statement, if you’re in one of our portfolios of individual bonds and bond-like instruments, your total return – if you’re not taking income and depending on your individual holdings – is still up by 1% on average year-todate, which means that annualized you’re on pace for about 6% total return for the year. That, of course, is our target goal for bonds and bond-like instruments: to get you a 5-6% annual income stream net of fees. So, again, two months into the year we are right on track!
Looking Ahead
As I always point out, while the financial markets can seem very reactionary, they are really forward-looking, so it’s always important to weigh the current economic picture against potential trends and developments down the road. As noted, one major factor driving future confidence for investors is the fact that the Fed – after bringing short-term interest rates up to over 5% – now has plenty of ammunition to deal with any pending economic downturn by lowering interest rates again. On the flip side, as I also noted, Wall Street’s strength right now is still based largely on the artificial intelligence boom, and if there is one thing we all know about tech bubbles it’s that they can burst. That may or may not happen this time around, but the potential is always there when it comes to speculative investing.
Beyond that, it’s also important to remember that many things can disrupt financial markets, including natural disasters and major geopolitical events, and there is certainly plenty of potential for one of those to crop up this year. Let’s also not forget that this is a presidential election year, and probably a rematch of the most contentious and divisive election in recent memory. Although, in my experience, the ultimate results of the election typically have little impact on the markets, the tensions leading up to it can trigger some volatility.
The main point here, of course, is that it’s important to stay informed, which is precisely why I strive to help you do that through this newsletter and my monthly videos. So do continue to make good use of them, and feel free to reach out to our office at any time if you have any questions. In the meantime, continue to enjoy the relative calmness of the markets right now, enjoy the rest of your winter, your Easter, and – at long last – the start of spring!
1 “Powell Reinforces Position That the Fed is Not Ready to Start Cutting Rates,” CNBC, March 6, 2024
2 “US Inflation Hotter Than Expected in January,” The Guardian, Feb. 13, 2024
3 MarketWatch.com
4 “S&P 500, Nasdaq Hit Fresh Records to Cap Best February in Nearly a Decade,” Yahoo Finance, March 1, 2024
5 “Fourth Quarter GDP Revised Slightly Downward,” US News & World Report, Feb. 28, 2024
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