Welcome to the monthly market update from Midland Wealth Management. I am Dan Zeigler, Senior Portfolio Manager. Today I just wanted to spend a few minutes to give you an update on the markets for the month of February.

Market Returns for February

The stock market continued its upward trend in February, as both the S&P 500 and the Nasdaq ended the month at their all-time highs and have had positive returns for four months in a row. In fact, the NASDAQ closed at its first record-high since 2021. The S&P 500 for the month was up 5.2% and is now up around 6.8% for the year. Small-cap stocks also had an impressive run in February with the Russell 2000 index up about 5.6%.

The 10-year Treasury is currently yielding around 4.2%, which has led to mortgage rates hitting a two-month high. The 30-year fixed-rate mortgage rate rose to an average rate just under 7.0%, according to the data released by Freddie Mac.

GDP

Real GDP growth in the 4th quarter was revised slightly lower to 3.2% annual rate from a prior estimate of 3.3%. GDP estimates for the 1st quarter range from 1.5 to 3.0%.

Federal Reserve

The next Federal Reserve meeting will be on March 20th and expectations for when the first rate cut is anyone’s best guess. The Fed has forecasted it may make three quarter-point cuts by the end of 2024, which would lower the benchmark rate to around 4.6%. The market was pricing in over six rate cuts earlier this year, however, it appears more realistic now with the market anticipating around 3 ½ rate cuts. The market is now anticipating the first rate cut could be at the Fed’s June meeting.

After January’s hot CPI number, the Fed’s preferred inflation metric was also set to jump which explains why the Federal Reserve can be patient in their approach to start cutting interest rates. January’s core Personal Consumption Expenditures (PCE) rose by 0.4% month-over-month, equating to an annual rate of nearly 5.0%. The year-over-year rate dipped to 2.8% from 2.9% and expectations are for the core PCE rate to continue to trend lower throughout the year.

Corporate Earnings

Corporate earnings came in strong in the 4th quarter as 73% of the S&P 500 companies have reported a positive earnings surprise and 64% of the companies have reported a positive revenue surprise. Overall earnings growth was better than anticipated as companies grew profits in the mid-single digits. The Information Technology sector earnings growth rate was around 22%, which NVIDIA was the largest contributor to the sector’s growth. The forward 12-month price to earnings ratio for the S&P 500 is around 20.4x, which is above the 5-year average of around 19x.

Outlook

While a still robust labor market has so far supported consumer spending, the combination of higher borrowing costs and persistent inflation may be slowing down consumer spending. Household spending rose only 0.2% last month, which was the smallest increase in three months. On March 8th, the non-farm payrolls will be released and the market is expecting the economy to add 188,000 jobs and for the unemployment rate to be unchanged at 3.7%. As always, thanks for joining me for this month’s market recap.