February was a month overshadowed by the euphoria in the stock market and cryptos. Despite the markets adjusting their number of rate cut expectations lower, the stock market continues to fly on the back of AI. Bitcoin also powered ahead and reached beyond $63,000 pushing ever closer to its all time record of $69,000. Other asset classes pales in comparison. In particular, bonds went down which is in line with what one would expect as yields went higher with rate cuts being moderated. These are the key highlights for the month.
Markets moderated their rate cut expectations from almost seven 25 bps cuts when the year started to just three
2024 began with great hopes for generous rate cuts. A cut was priced in for almost every FOMC meeting starting in March. These hopes dissipated rapidly as a slew of strong economic and inflation data came in with the Fed tempering the market's expectations whenever they could. As of the end of this month, the Fed Funds futures are projecting only about 3 cuts for the year now. This is not necessarily a bad thing, as a narrowing in the gaps between what the market and the Fed expect lowers the chance of violent market reactions.
The labor market continued its robust growth beyond what is forecasted
The resilience of the US labor market continued to surprise the market. Non-farm payrolls were almost double the forecast. YoY average hourly wages grew more than predicted and unemployment dipped below what was anticipated. This strength is both a boon and a threat. It is a boon as that means the economy has thus far been able to hold up against the higher interest rate environment. A hard landing scenario that many worry about becomes more distant. But at the same time, it can make the fight against inflation more challenging.
Retail sales slipped considerably in January
Amidst strong reporting in other economic and labor data, MoM retail sales numbers buck the trend and came in quite a fair bit lower than expected. This was a turn from the strong showing in the previous year. It could be the result of harsh winter weather keeping shoppers at home or higher prices and rates finally starting to bite. Things should be clearer over the next few months.
CPI Core inflation showed an up tilt though PCE Core came in as forecasted
Earlier this month, an uptilt in the CPI data was a key reason that dampened hopes of the Fed cutting rates as aggressively as hoped this year. All the CPI inflation readings came in hotter than the consensus. The headline inflation did slow but not as much as markets thought it would. The key problem, however, is that core inflation showed signs of stalling as rental, food, and transport costs rose. PPI data which was released subsequently showed a similar increase. But some tension was released after the Fed's preferred gauge of inflation - PCE readings, which holds a smaller component in housing as the main contributor to CPI inflation, came in within expectations on the last day of the month.
Asset Class & Sector Performance Snapshot for the Month
Portfolio Updates
Despite a lower number of rate cuts expected this month, the US stock market continued its euphoric rise. The strong earnings reported, particularly by the heavyweights such as Nvidia, driven by AI trend, propelled the S&P 500 to record highs. This benefitted our model's holdings in SPY and the sector ETFs. The rise is fairly broad based and most sectors did well. Our model's position in bonds, however, took a hit this month as the market lowered their rate cut expectations. There is slightly more activity in volality trades this month. Our model closed out an earlier short volatility position at a profit and subsequently went long later in the month to hedge against rising tail risks. That position have also been closed out at a modest loss. Overall, the multi-strategy model portfolio is up +1.9% for the month bringing this year's return to +0.9% YTD.
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* This is the model performance of portfolios constructed using more advanced strategies than those taught in our courses. They can be implemented with the assistance of an iFAST Global Markets (Singapore) senior investment adviser. Note that live performance may vary due to execution price slippages, the difference in sizing precisions, etc. All performances are measured in USD terms.
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