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February 10, 2024 Market Update

U.S. stocks continued rising for the trading week through Friday, February 9th.   The S&P 500 Index rallied 1.4%, marking its fifth straight weekly gain and another record high. 

The bond market, by contrast, remained in a trading range, closing down 0.9% for the week, near its lowest close in two months, based on the Vanguard Total Bond Market ETF (BND).  Resilient U.S. economic data and comments from Federal Reserve officials that reaffirm the central bank will remain patient in cutting interest rates – factors that have helped lift Treasury yields (and trim bond prices, which move inversely with rates) – were contributing factors for the weakness in bonds.

Many publicly traded companies have released their earnings reports for the 4th quarter of 2023 and, so far, the results have been largely positive.  Based on information released to date, the 4th quarter earnings of companies that are traded on U.S. stock exchanges are about 9% higher than a year earlier, which is much better than the 4.7% rise that analysts were expecting. 

Earnings season is an important time for investors and others who rely on analysts' review of a company's quarterly results and assessment of the intrinsic value of its stock.  Generally speaking, when a company’s earnings increase, so does its stock price.  As a result, the current earnings season provides support to the notion that the ongoing stock market rally hasn’t yet run its course. 

But threats remain, including the risk that high interest rates will yet again trigger the start of a recession.  A warning sign of that possibility has recently arisen in the form of an inversion of the inflation-adjusted yield curve.  As opposed to the traditional yield curve, which has been inverted for more than a year now, the U.S. real yield curve has only been inverted for about a month.  

The yield curve is said to be inverted when short term rates rise above their long-term counterparts.  That can spell trouble for the stock market because when that happens, investors can earn attractive returns in low-risk assets such as bank deposits and short-term bonds.   

Nobel Laureate economist Joseph Stiglitz still sees the potential for trouble ahead.  At a forum last week, he shared the view that the sharp rise in interest rates will remain “a threat to growth in 2024.”  He cites the “long and variable impact” of monetary policy as a lingering headwind, noting that policy changes can take time to fully impact the economy. 

And there lies the challenge for investors.  It’s one thing to predict the end of a bull market; it’s quite another to get the timing right.  

That’s all for now.  Have a great weekend and invest wisely my friends.