April 2024 Insights

In the first quarter of 2024, the financial markets witnessed a mixed landscape: stocks and commodities achieved milestones, while long-term U.S. Treasury bonds dipped as interest rates ticked higher. Notably, the Dow Jones Industrial Average, S&P 500, and NASDAQ Composite all recorded record highs by late March.  Concurrently, the yield on 10-year U.S. Treasury bonds escalated from 3.88 percent at year-end to 4.32 percent on the first of April.

The commodities market also displayed impressive trends.  Gold’s value reached a historic peak, trading above $2250 per ounce.  Similarly, West Texas Intermediate crude oil prices climbed to over $83 per barrel, up from around $71 at year-end.  Furthermore, cocoa futures witnessed a significant surge, soaring beyond $10,000 a ton, marking an increase of over 130 percent this year, indicating a forthcoming rise in chocolate prices.

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For the first time, the S&P 500 index rallied above the 5000 mark, closing February at roughly 5096, up 5.1 percent.  Meanwhile, the yield on the 10-year U.S. Treasury Note ticked up to 4.25 percent from 3.99 percent at the end of January and 3.88 percent at year-end.  Additionally, the price of West Texas Intermediate oil rose about 3 percent in the month to roughly $78.50 a barrel.

Inflation as measured by Core Personal Consumption Expenditures (Core PCE) – the Fed’s preferred inflation gauge – rose 0.4 percent month-over-month.  On a 3-month and 6-month annualized basis, Core PCE increased 2.6 percent and 2.5 percent, respectively.  On a year-over-year basis, Core PCE has fallen from a peak of 4.5 percent in late 2021 to 2.8 percent currently, the lowest rate since April 2021.

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January saw the S&P 500 index rally 1.5 percent, continuing the momentum of the markets since late October, and reach a new all-time high above 4900 as U.S. lawmakers agreed on another “temporary” spending bill.  As Congress continues to kick the proverbial fiscal can down the road, U.S. federal debt has increased more than $1 trillion over the past three months to over $34 trillion. 

Nevertheless, the interest rate on the 10-year U.S. Treasury Note fell from 4.20 percent at year-end to 3.99 percent on January 31, 2024, while oil prices rose roughly 10 percent as tensions in the Middle East escalated.

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In December, U.S. stock and bond markets experienced a significant rally, rounding off a robust year. This surge came after Federal Reserve Chairman Jerome Powell hinted at an end to interest rate hikes, a move that caught the markets off guard.  This was particularly surprising given Powell’s earlier comments on December 1, 2023, where he deemed it “premature” to discuss interest rate cuts.  Yet, in a notable shift, just 12 days later, he acknowledged that interest rate cuts were “a discussion for us at our meeting today.”

The banking sector witnessed significant upheavals, with the collapse of Silicon Valley Bank in March and the failure of First Republic in May — the latter marking the second-largest bank failure in U.S. history.  Paradoxically, these events spurred positive market reactions as the Federal Reserve infused liquidity via the Bank Term Funding Program (BTFP).  By the end of the year, the BTFP’s value escalated to over $135 billion, a significant jump from under $65 billion at the end of March.

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After three consecutive monthly declines into late October due primarily to rising interest rates, a strong counter-trend rally emerged in both the bond and stock markets during November.  This rally, propelled by a drop in the yield on the 10-year U.S. Treasury Note from over 5.00 percent in late October to 4.37 percent by month-end, resulted in an impressive 8.9 percent surge in the S&P 500 index.

By July 31, 2023, the yield on the 10-year Treasury had dipped below 4.00 percent.  However, in a remarkably short span, it soared above 5.00 percent for the first time since 2007.  This sharp increase in interest rates exerted downward pressure on equity prices.

October data revealed hedge funds heavily shorting U.S. Treasury securities and equity futures, reaching record levels, thereby betting on future price declines.  Yet, with the release of October employment data indicating a mere 150,000 increase in payrolls – the smallest gain since January 2021 – and revisions of 101,000 jobs downward for the previous two months, bond interest rates declined as hedge funds rushed to cover their negative bets.

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In October, the U.S. stock and bond markets experienced a decline, driven by escalating geopolitical tensions, rising interest rates, and concerns over political discord in Washington, D.C.  The S&P 500 index saw a decrease of approximately 2.2 percent for the month, while the yield on the 10-year U.S. Treasury Note rose from 4.59 percent to 4.88 percent by the end of October.  Crude oil prices also dropped by about 8.8 percent, settling at $81.54 per barrel.

This decline in the S&P 500 index marks the third consecutive month of losses, coinciding with the upward trend in interest rates.  To illustrate, the yield on the 10-year U.S. Treasury Note stood at approximately 4.0 percent in early August, but by late October, it had surged to just above 5.0 percent. This represents a significant shift in a relatively short span of time.  While we have been highly critical of the Federal Reserve for some time, there have been few prominent figures willing to call them out. However, just a week ago, Jamie Dimon, the CEO of J.P. Morgan, candidly stated, “I want to point out the central banks eighteen months ago were 100 percent wrong.”

When confidence wanes, markets tend to feel the impact.  Encouragingly, historical data shows that markets often rebound after oversold conditions, such as those observed at the close of October.  Over the last ten years, the S&P 500 has rallied in the month of November in 9 out of 10 instances.

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August market weakness extended into September, driven by concerns regarding Federal Reserve policy and the potential for a U.S. government budget standoff. The S&P 500 index experienced a significant 4.87 percent decline during September, with the majority of this drop occurring after the Federal Open Market Committee (FOMC) meeting on September 19-20, 2023. Despite the Federal Reserve maintaining steady interest rates, they revised their predictions, anticipating interest rates to be 50 basis points (0.50 percent) higher at the close of 2024 and 2025 compared to their assumptions just three months prior.

We choose to use the term “prediction” deliberately, given the Fed’s track record of inaccurate forecasts. This has eroded market confidence in the institution, exemplified by the 10-year U.S. Treasury rates, which climbed from 4.09 percent at the end of August to 4.59 percent by September’s close, marking the highest levels since August 2007.

Meanwhile, West Texas Intermediate (WTI) oil prices surged to $95 towards the end of September, a staggering 40 percent increase since June. This jump was fueled by supply cuts from Russia and Saudi Arabia, stoking concerns of an impending imbalance in the oil market.

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In August, various markets experienced significant fluctuations driven by key events. Fitch Ratings downgraded the credit rating of U.S. debt (from AAA to AA+) during the month, coinciding with a notable increase in the yield on the 10-year U.S. Treasury Note, which reached 4.34 percent. This marked the highest yield since November 2007. As a result, the S&P 500 index declined 1.77 percent over the course of the month. Additionally, the price of a barrel of West Texas Intermediate (WTI) oil surged to its peak for the year, surpassing the $85 mark.

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July saw a continued rally in the equity markets, with the S&P 500 index gaining 3.11 percent. This impressive performance was fueled by cooling inflation and the resilience of the U.S. economy, despite the Federal Reserve raising interest rates by 25 basis points, reaching the highest level since January 2001, with a federal funds target range of 5.25 percent to 5.50 percent.

However, some of the positive factors that contributed to the rally may be shifting. Oil prices surged more than 15 percent in July after Saudi Arabia announced an extension of its one million barrel per day supply cut. Additionally, interest rates on the 10-year U.S. Treasury Note climbed above 4.0 percent, up from 3.32 percent in May. Furthermore, the U.S. dollar showed signs of strengthening, having declined by over 12 percent since last September. While a weaker dollar can benefit U.S. companies operating abroad by reducing product costs and potentially boosting profits, a stronger dollar may create headwinds.

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