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Thoughts of the Week - February 23rd

We’re having another leap year! This year, February will include another day—the 'bonus' day that we get about once every four years. While this practice may seem arbitrary, there is actually science behind it. Since the earth takes 365.25 days to rotate around the sun and our calendars round down to 365 days in a year, a fractional surplus of time remains unaccounted for each year. The ‘bonus’ day is needed to ensure that our seasons don’t fall out of alignment. The last leap year occurred in 2020, just around the time the global economy was beginning to be impacted by the COVID-19 pandemic.

The world has changed, and the economy and the financial markets have experienced a rollercoaster the last four years, so we thought it would be instructive to take a look at how things have evolved over that time period:

Stocks Have Leaped Higher

Four years ago this week (2/19 to be exact) the S&P 500 climbed to an all-time high of 3,386 before plunging over -34% as the world economy shutdown due to the pandemic. Ironically, despite the pullback, with the S&P 500 today trading at 5,087, the four-year average annual return of the S&P 500 is 12.5%, once again suggesting that investors willing to endure volatility can be rewarded with long-term performance. Some of the performance statistics over that time period include:

  • Since bottoming at 2,237 in March 2020, the S&P 500 has gone on to achieve 108 new all-time highs—with the bulk of the records occurring in 2021 as the economy and earnings recovered, powered by massive monetary and fiscal stimulus.

  • Over the last four years, the S&P 500 sectors that have led the rally include the Technology and Energy sectors, which are cumulatively up 115.4% and 90.1% (or 21.1% and 17.4% annualized), respectively.

  • However, the stock market’s recovery experienced its fair share of volatility along the way, with 14 5% pullbacks, 3 10% and a bear market (a decline of 20% or more) in 2022 along the way. Fortunately, the resilience of the US economy, moderating inflation and the end of the Fed’s tightening cycle turned sentiment around, lifting the stock market back into bull territory.

  • While our near-term market outlook is cautious given our expectations for slowing growth, relatively expensive valuations and bullish sentiment, we believe this bull market is still in its infancy. That’s because we are only 1.3 years into this bull market versus the average bull market lasting approximately 5.5 years.

Bonds Have Not Yet Recovered Their Losses

The grind higher in interest rates over the last four years has been painful for fixed income investors. Since the all-time low bond yields following the pandemic, the Bloomberg US Aggregate Bond Index suffered an unprecedented max drawdown of over 18%! That’s because the 10-year Treasury yield marched from a low of just 0.52% in August 2020 to near 5.0% last October.

  • From an historical perspective, the length of the bear market in bonds is unprecedented—lasting 43 months. That’s nearly double the length of the previous longest bear market in bonds (October 1998 to March 2000).

  • The bad news: if bond yields stabilized at current levels and remained steady for the foreseeable future, it would take another two years before the bond market was able to fully recoup the losses it sustained.

  • The good news: the income generated from bonds (the highest in over 15 years) is starting to chip away at these losses. And, with the Fed’s tightening cycle now complete and an easing cycle on the horizon as growth and inflation ease from current levels, lower bond yields in the months ahead should bolster bond market performance and close the gap even faster.

Economic Growth Has Not Skipped A Beat

Despite criticism for letting the inflation genie out of the bottle, the Fed has done a very good job steering the economy through a once-in-a-generation pandemic, soaring inflation, supply chain disruptions and wars overseas. If the Fed is able to engineer a soft, non-recessionary landing, it would only supplement its already positive legacy in dealing with some of the most complex and extreme economic dynamics we have seen in decades. In fact, if you fast forward from the start of the pandemic to today, the economy has been resilient and is in the process of normalizing.

  • Despite all the ups and downs, the US economy has expanded by over $2 trillion or 9.7% (2.3% annualized) to record levels. Leading the way has been the consumer, with personal consumption expenditures driving the increase over that period, expanding by 12.3% (2.9% annualized) or $1.7 trillion.

  • No doubt there was an inflation spike that sent the Fed’s preferred measure of inflation (PCE) up to 7.1% in June 2022. But that was short-lived. The disinflationary trend remains well established with the PCE decelerating to 2.6% on a year-over-year pace—and is likely to fall further after next week’s release.

  • The unemployment rate has remained at 4.0% or below for 26 consecutive months—a record last seen in the late 1960s. In fact, it hasn’t changed much since February 2020 (3.5%), but average hourly earnings increased by 21% (or 4.9% annualized).

Chart of the Week

The Bond Market Has Still Not Recovered Its Losses

The sharp increase in interest rates since the pandemic has led to an unprecedented drawdown in the bond market of over 18%. Nearly 43 months later, bonds still have not recovered their losses.


The Leading Economic Index declined by a more than expected 0.4% in January. However, The Conference Board indicated that the Index is no longer pointing toward a recession as 6 out of 10 components were positive contributors over the past six-month period* and indicated that “While no longer forecasting a recession in 2024, we do expect real GDP growth to slow to ~0% over Q2 and Q3.”

As expected, home buyers responded decisively to lower mortgage rates in January, as Existing Home Sales increased by a more than expected 4000k (or 3.1% MoM).* This increase in sales pushed inventory levels further down, to 3.0-month supply compared to 3.1- month supply the month prior. The median price of existing homes was $379,100, or 5.1% higher than in January of 2023.

Focus of the Week: Next week brings a slew of reports relating to the housing sector, and given mortgage rates were slightly lower, we expect these reports to reflect some strength. On the inflation front, the Federal Reserve’s preferred gauge for price inflation, the Personal Consumption Expenditure price index, will be released Thursday, and we expect a YoY growth of 2.3% in the headline figure.


One of our 10 themes of 2024 is continued strength in AI investment and a broadening of AI monetization across front-end applications which leads to our positive stance on the Technology sector. A key barometer for this theme and arguably the most widely anticipated earnings release of the quarter came Wednesday night when Nvidia yet again exceeded very high expectations confirming that the AI theme is still in early innings. Management's guidance suggests that demand for AI Accelerators will continue to outpace supply through 2024 confirming our thesis that AI investment is a top priority for companies globally. This led the S&P 500 (+2.1%) to post its best one-day performance since 1/6/23 led by a 4.4% gain for the Technology sector, its best since 5/25/23 when NVDA released 1Q23 results.*

This week also provided an update on the consumer via earnings results from major retailers (WMT, HD). From the retailer's point of view, macro headwinds to the consumer are less severe than in 2023 but still present (especially in larger discretionary purchases). However, retailers are still working through sticky supply costs combined with a more challenging pricing environment due to easing inflation that led to conservative margin guidance. Inventory levels have mostly normalized from elevated levels in 2022 and 2023 which should prevent severe margin compression in 2024.

Focus of the Week: Next week will provide the final 4Q23 update on AI monetization within enterprise software when Salesforce reports earnings results on Thursday.


Treasury yields pushed modestly higher after a terrible 20-year auction (low bid-to-cover ratio and weak foreign participation). The FOMC meeting minutes were a non-event, as policymakers’ insights were delivered before the recent uptick in inflation. However, a slew of Fed speakers uniformly delivered the message that the Fed wants to see more evidence of inflation cooling before it begins to cut rates. The only nugget out of the meeting minutes was that they confirmed that Fed officials will begin in-depth discussions on the eventual QT taper at the March meeting, something that Powell previously mentioned.

Strong equity gains and growing momentum around the soft-landing narrative has driven credit spreads (Investment Grade: 89, High Yield: 306) to their lowest levels in nearly two years—and well below their 10-year averages.* The spread tightening comes even after a deluge of supply, with corporations issuing much more supply to the market. In fact, investment grade and high-yield issuance is up 25% and 43% respectively from the same period last year.

Focus of the Week: The Treasury market will need to absorb $169 billion of 2-, 5- and 7-year notes next week. After the poor 20-year auction this week, all eyes will be on investor’s appetite for shorter-maturity bonds, particularly given the recent back up in yields. Next week also brings more Fed speakers (NY Fed Williams, in particular) and PCE data.


Risk of a government shutdown looms as the March 1 and 8 government funding deadlines approach, and some House Republicans are threatening to block a deal, unless the final bill includes policy changes they have long sought, which adds to the political uncertainty. The House and Senate are in recess and will return just days ahead of the first deadline. Negotiations on the twelve individual full-year bills have made solid progress, but the short timeline and House dynamics have elevated risks around the appropriations process.

Several recent failed votes for House Speaker Mike Johnson and a further narrowing of the House Republican majority highlight the difficulties that Johnson will face. If Johnson pushes for the passage of an additional short-term stopgap or the passage of the full FY24 appropriations bills with the support of House Democrats, a repeat of the dynamics that led to the ousting of former House Speaker Kevin McCarthy becomes a more likely scenario. We overall remain optimistic from a fiscal perspective—even if a March shutdown or May spending cuts happen, fiscal support in DC will remain strong due to prior key spending bills.


This week, US natural gas prices briefly fell to 30-year lows. Henry Hub gas bottomed near $1.50 per thousand cubic feet, a level not seen since 1995 (with the exception of a few days during the initial crisis period of COVID). Although prices have bounced from this trough, natural gas remains well below the $2.00 level. The reason? This is a very warm winter.* Bearing in mind that natural gas usage on both sides of Atlantic is disproportionately for heating, warm winters are more ‘bearish’ for gas prices than hot summers are ‘bullish’. All else being equal, cheap natural gas—much like cheap gasoline—is good for consumers, as it enables more of a household’s budget to go toward discretionary spending.

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