March Outlook: Bulls On Parade 4th Straight Monthly Gain By: Jeffrey A. Hirsch & Christopher Mistal | February 29, 2024 | Email | Print

So much for February being the weak link in the Best Six Months. The bulls continue to stampede down Wall Street logging the fourth straight monthly gain in a row for the S&P 500. The market is likely to consolidate over the next several months as it digests these gains and the usual ramp up of election year mudslinging. But we do not expect any major correction. 

 

When the S&P 500 is up November, December, January and February in a row, the full calendar year has never been down, up 14 out of 14 for an average gain of 21.2%. And the action over the next 10 and 12 months is just as strong. The following March in these years only had a few minor losses. This positive market action supports our continuing bullish outlook for 2024.

 

 

The Fed appears to have engineered the soft landing and proven doubters wrong. A recent Wall Street Journal article details how Fed Governor Waller challenged economic orthodoxy by recognizing that after the pandemic the labor market could remain tight and unemployment low as the economy reopened. In a May 2022 speech Waller said, “We’ve never seen this type of demand for workers, and that’s what makes me think we could do it.”

 

Many of you will remember our stance over the past year and half or so that we had our recession in the first two quarters of 2022 when GDP was down back-to-back in Q1 and Q2 and that all the forecasts and predictions for recession were unfounded and based on outdated models. In fact, in case you missed it, the vaunted Conference Board gave up on its recession call for the U.S. this year. Although they still contend that their Leading Economic Index (LEI) indicates economic growth will moderate over the next several months. Perhaps, but GDP still appears to be resilient as per the last several readings and the Atlanta Fed’s rather prescient GDPNow model estimates.

 

 

We do have some concerns, though, that have the potential to weigh on the market over the next several months that may keep a lid on further gains. Numero uno is the Fed. Most everyone on The Street is overly optimistic that the Fed will cut rates sooner than later, expects them to cut substantially, and to start well before the election so as to not appear political. 

 

It seems clear that with unemployment in check and GDP growth steady, the Fed is predominantly looking at inflation data to make any rate change decisions. And the one they look at is the headline Personal Consumption Expenditures (PCE) index, including food and energy. It clearly states here in the St. Louis Fed’s FRED database that this is “is the Federal Reserve’s preferred measure of inflation.”

 

Now, today’s PCE reading was in line with expectations, which is nice in the short run. But looking at our updated PCE projection chart with today’s number plugged in reveals that the Fed is not likely to be in a rush to cut rates. Today’s monthly change was 0.3%, which put the 12-month rate at 2.4%, which is above the Fed’s stated 2% target. As you can see in the chart below, anything above a 0.1% monthly change will keep inflation above 2%. Any monthly change greater than 0.1% is likely to delay any Fed rate cut until after midyear if not longer.

 

The Fed may have engineered the goldilocks soft landing, but with inflation persistent while the economy remains resilient and unemployment stays down, there’s no need for the Fed to rush to cut rates. Historically, the Fed is slow to lower rates and has only moved quickly when there is a real crisis at hand, which there clearly is not at the moment. Until we see the Fed’s preferred inflation PCE metric sustained at or below 2% we believe they are not likely to cut. 

 

 

 

We have warned you about the Ides of March and the market’s difficulties in the last month of Q1 as institutional window dressing and the week after triple witching have helped cause some end-of-quarter hits as well as the mixed record of election-year Marchs. Much of the weak election year March performance is due to the Covid Crash in 2020 and the Hunt Bros’ attempted run on the silver market in 1980. 

 

Inspired by some subscriber inquiries we stripped 2020 out of the Sitting President Running Seasonal Pattern Charts for S&P 500 and NASDAQ Composite. As expected, the mid-February to late-March seasonal retreat flattened out considerably without 2020 in the average. So, with all the bullish vibrations over the past four months, what looks like the early days of a real AI-driven tech boom, solid economic data, sitting president running election year forces and a Fed in no hurry to change rates, we expect only mild pullbacks and a choppy sideways market over the next several months on the backdrop of our overarching bullish outlook for 2024. 

 

 

 

Despite concerns about market leadership concentration and valuations, milestones continue to fall as the market climbed higher throughout February. S&P 500 closed above 5000 for the first time ever on February 9, DJIA closed above 39,000 (1) and NASDAQ 100 closed above 18000 both on February 22. But positive momentum appears to be slowing with both the faster and slower moving MACD indicators trending sideways for the last five weeks (2). Thus far market dips have been shallow, and brief as economic data, corporate earnings, and Fed rate cut expectations have quickly reversed any negative developments.

 

 

DJIA (3), S&P 500 (4), and NASDAQ (5) have all advanced in 15 of the last 17 weeks. Looking back through our database this streak is not unprecedented, DJIA last matched this weekly streak in 1995, S&P 500 did it in 1989 and NASDAQ in early 2019. Looking back to 2019, NASDAQ did consolidate its gains after the streak came to an end but went on to gain nearly 10% more before yearend and over 35% for all of 2019.

 

Market breadth over the last five weeks has been generally fair. NYSE Weekly Advancers (6) had their best showing in the week ending January 26 when they outnumbered NYSE Weekly Decliners by nearly 3 to 1. Since that week, Advancers have had a modest advantage in three of four weeks with one of the weeks being down (ending February 16). It would be preferable to see more Weekly Advancers and fewer Weekly Decliners as it would suggest the rally is broadening out. This may not happen until the Fed cuts rates and the more rate sensitive stocks in the market come back to life.

 

The choppiness of Weekly New Highs and New Lows (7) paints a similar picture as Weekly Advance/Decline numbers. Overall, New Highs have been trying to expand while New Lows have remained rather stable with less than 100 over four of the last five weeks. Once again, more New Highs and fewer New Lows would be preferred, but recent numbers do not appear to suggest any pending severely negative outcome.

 

The 30-year Treasury bond yield has continued to creep higher over the last five weeks (8) to its highest level of 2024. The increase has been small and relatively slow, so it appears to have had little impact. This increase is likely the result of the market adjusting to when it anticipates the Fed will begin cutting rates along with recent inflation data. If rates remain reasonably stable, they will likely have little impact on the stock market.