Mullooly Asset Management
Fiduciary Fee-Only Financial Planner | Investment Advisor in Wall, NJ
Mullooly Asset Management
Navigating February 2024: Market Commentary
Uncover the mysteries of February's financial turbulence as I, Tom Malouli, guide you through the stormy seas of market volatility and inflation. This episode promises a deep understanding of the undercurrents that rock our investments and how historical patterns can forecast potential downturns. I delve into why February is the Achilles' heel of the robust November-April period and dissect the implications of the latest Consumer Price Index report—with a focus on Wall Street's reactions and the Federal Reserve's methodical handling of interest rate adjustments. It's a journey into the heart of financial forecasting, where I share insights that could enrich your portfolio and prepare you for the waves ahead.
In the concluding chapter of our episode, the Malouli Asset Management Podcast wraps up its 472nd session with a treasure trove of knowledge from industry experts. Drawing from our engaging discussions, I offer personal reflections on the art of asset management, providing context and strategy to inform your investment blueprint. Stay tuned for our next installment, where we continue to chart the course through the investment landscape, equipping you with the knowledge to make calculated decisions amidst the complexities of the market. Join me as we prepare to navigate tomorrow's opportunities with the wisdom of today's financial mavens.
Welcome back to the podcast. I am Tom Malouli and this is episode number 472. Episode 472 of the Malouli Asset Management podcast. Welcome back. I want to give a market message. We've had some more volatility than we are used to seeing lately and I want to talk about that in this episode. There's a strong probability of some weakness ahead in later February and into March. That is usual and customary to see this kind of market slump at this time of year.
Speaker 1:Many times we start the calendar year off very strong. We talked in a previous episode about the Santa Claus rally, about the first five days of January and the January barometer how they can give us a good indication of what the year is going to look like Most years. Sometimes all of these indicators are positive. In 2023, all three indicators were positive and we were off to a very good start at this point in February of 2023. Now here we are in February of 2024. We are recording this on February 16th, 2024. We've seen the market move up. We've seen some more volatility, though, over the last week or two.
Speaker 1:Before we get into the details of some of the economic numbers we've seen, I think it's important to just remind our listeners about the sell-in-may-and-go-away theory. That tends to work historically. It doesn't work every year, but it tends to work historically. The idea is, or the concept is, sell-in-may-and-go-away. What that indicates is that typically the months from May through October, that six-month window of time, historically has returned lesser returns on the Dow Jones and the S&P 500. So if those are the weaker months, then that means the best months are the opposite period and that is from November through the end of April. That's usually the opposite corollary of the week months. This is the best month period. So the period between November and April, typically a lot stronger than the returns we've seen historically from the May through October period. Now, of the six months in the historically best month window of time, february is the weak link. Of the best six months, markets tend to get a little sloppy. February of 2024 is no exception. When you also combine the weak link feature of February 2024 with the fact that we're also in the fourth year of a presidential cycle going back to 1950, the returns in the month of February are lukewarm at best and sometimes they're even down. Important things to know just from historical yard markers.
Speaker 1:Now, earlier this week, on Tuesday February 13th, the government released the Consumer Price Index movement for the month of January. So January CPI the number came in at an increase of 3 tenths of 1%. That was more than the market expected. On a one year year over year basis, the Consumer Price Index the rate of inflation that most people use is now 3.1%. This number for January the year over year number 3.1% no-transcript is down from the rate posted in December. The rate the year over year rate in December was 3.4. So inflation continues to trend lower but market participants were looking for, and really hoping for, a number below 3%. They were looking for 2.9, they didn't get it.
Speaker 1:Tuesday we saw the Dow Jones industrial average slice off 524 points, really a massive move for a number that was pretty much in line with what the Fed was expecting. Trend continues to remain good. The trend in inflation continues to go lower, but it just wasn't the number that Wall Street magicians were looking for. Jay Powell, chairman of the Federal Reserve, and other Fed governors have said over and over we like the trend and they said that again on Wednesday and on Thursday of this week. They like the trend, the direction that inflation is going, they feel like they're making great progress and that there was nothing wrong with this CPI print for the month of January. So the Dow Jones sold off 524 points on Tuesday and we saw the Dow Jones essentially recover those same 500 points between Wednesday and Thursday of this week. Then Friday today, we saw the producer price index numbers for January come out. We'll get to that in a moment.
Speaker 1:But again, wall Street is extremely impatient. Don't ever forget that when you've probably seen a stock or even a bond that you own, when there is bad news, the price tends to reflect that bad news immediately. We've also seen it work in the opposite way when there is good news in the stock, a stock will close at, say, $50. If they have great news, the stock will open significantly higher. You couldn't even buy it in between where it closed and where it opened the next day. Wall Street is very impatient and it's easy to get sucked into the news cycle like this, but don't let that swing your investment decisions around.
Speaker 1:As we have been saying for now at least six months in podcasts, in client meetings, in videos, the Fed has no urgency to begin cutting rates. But this is what Wall Street wants. They want to see the Fed lowering rates, as we mentioned on the previous podcast episode, if the Fed were to begin cutting rates, it could actually spur some additional inflation. The Fed wants to be very, very cautious about lowering rates.
Speaker 1:In the late 1970s, paul Volcker, as Fed Chairman, raised rates because we had increasing inflation that triggered the recession that we saw in 1978 and 1979 due to higher oil prices. The truth is that we had a lot of inflation in the system, not just in oil prices, but by late 1979 and going into 1980, volcker and the Fed felt it was okay to back off the rate hikes and they actually started cutting rates. What happened with that? We saw a return of inflation. In fact, inflation went higher than it was in 1979. And so now Volcker was at the point where he had to raise rates above the rate of inflation. That is the only way that you're going to get inflation to cool off. You've got to raise your short-term borrowing rates above the rate of inflation. Well, at the time, we saw inflation in 1980 reach 13% and short-term Interest rates set by the Federal Reserve. The Fed funds rate got to 14% in 1980 and, if anybody listening to this was around at that time, you saw mortgages at 17 and 18%. You saw CDs short term rates at 18, 19. My father even came home one day with a rate of 20% on a short term CD from Marine Midland Bank.
Speaker 1:This is exactly what J-Powell and the rest of the Fed board is concerned about that if they start cutting rates they're going to be getting a return of inflation. So they are going to slow roll these rate cuts. They don't want to be in a situation where they have to reverse course and raise rates again. True to form. Friday morning this morning, february 16th, we received the January producer price index, the PPI number for January, which is a number that the Federal Reserve also relies on as an indicator. Because the producer price index think about what the name implies. This is the cost that manufacturers and producers have. So the raw materials cost, these wholesale kinds of costs, rose. According to the numbers we got this morning, they rose at the fastest rate that we've seen in the last five months.
Speaker 1:Very, very clear to us here at the firm, and also to many who are now taking the lampshade off their head on Wall Street, that the Fed is not done yet, that they still have to remain vigilant in watching the indicators before they start cutting rates. They do not want to be premature on cutting rates because if the Fed when the Fed cuts rates, it tends to spur the economy into further growth. So let's just think about this a few months down the road If we have a Fed that's cutting rates, there's more potential for growth, which means more potential for additional inflation. This is not what the Fed wants. According to the conclusion that, while there are some market strategists out there who believe the Fed is going to need to cut rates three, four, five times in 2024, I don't see that happening at all. In fact, I think the Fed may cut rates once this year and there's a possibility that they may not cut rates at all this year in 2024.
Speaker 1:As we mentioned on the previous episode, we're bumping into presidential election season. The Fed typically likes to sit that out. The only time that they tinkered with interest rates during a presidential cycle the only time, going all the way back to 1913, the only time that they did this was in 2008. No-transcript. By that point it was really too late for them to do anything. The CPI is the consumer price index is the headline number, but one of the big numbers that the Fed watches in addition to that is the producer price index, which we got this morning, the PPI for January. So inflation hits the wholesalers, the manufacturers, first, and then that tends to trickle over into the consumers at a later date. So you're producing something in January, february, it doesn't hit the shelves for a while and you're going to see maybe not increased inflation, but certainly it's going to take a while for inflation to come down.
Speaker 1:So we're at this point where we see January was a healthy month in terms of returns for the market, but there's a strong possibility that we're going to see some weakness in late February and probably into and through March. This is we've got historical data that lines up with this this typically tends to happen. This weakness that we see in mid to late February and then into March, this typically happens right before the rally resumes. And so very similar to what we saw last year in 2023, where we had a year where the most of the market the S&P 500 was up about 14 or 15% in July. Then we went into a slump, chopped off about half of that return in September and October, but we finished the year up over 20%. I'm not saying that we're going to get 20% returns in 2024. That may be clear about that, but I think we'll see a somewhat similar pattern as we go through the spring February weakness, march sloppiness, and then the rest of the year looks to be pretty okay. So not a big surprise if we see the market pause here or even go down a little bit. I don't believe this is going to be any kind of serious or damaging pullback, but I think we can certainly stall around here.
Speaker 1:This also when we make new highs, like we have been recently the last few weeks with the markets, whether it's the Dow Jones or the S&P or even the NASDAQ. These market tops tend to be a lengthy process. It's very unusual for the market to make a new high and immediately start drawing down on it. So this process of making new highs or staying close to new highs may only just be the beginning. So right now, outside of any kind of world events going on, it seems like the talk of Fed rate cuts is on everyone's mind and seems to be a driver of stocks. We just don't know when that's going to happen and, as I had just mentioned a moment ago, there's a growing possibility that the Fed may not cut rates at all in 2024. And, as a result, we may see multiple rate cuts in 2025.
Speaker 1:Hard to say at this point, I think the folks that are out there projecting 3, 4, 5 rate cuts are. I don't know where they're getting that information from. What does that mean for you and I? Any kind of pullback that we get in the market is going to be a terrific opportunity to put more money to work, and you should be prepared to do that over the next six to eight weeks. It's a good time to be putting money into the market. Otherwise, other indicators all seem to be looking very friendly, in the sense that this is a good opportunity, good backdrop, to be putting money to work and don't see any need for drastic changes in our portfolios. So we appreciate you listening. This has been episode number 472 of the Malouli Asset Management Podcast. Talk to you again soon.
Speaker 2:Tom Malouli is an investment advisor representative with Malouli Asset Management. All opinions expressed by Tom and his podcast guests are solely their own opinions and do not necessarily reflect the opinions of Malouli Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Comments of Malouli Asset Management may maintain positions and securities discussed in this podcast.