FEBRUARY 2024 Market Review

Buoyed by strong earnings releases for 2023 and the perception that the FOMC’s next move will be to reduce short-term interest rates, the equity markets posted a strong February – see table below. YTD returns on domestic equities range from 2.68% in small and mid-cap stocks to a whopping 7.33% in the technology-laden NASDAQ. Bond returns continue to languish as strong growth/employment data gives the FOMC the wherewithal to take a “wait and see” approach on inflation trends before cutting rates.

The combination of rapidly growing debt at the Federal Government level makes Trajan Wealth cautious on the level of intermediate and long-term interest rates, the benchmark for borrowing costs across much of Corporate America and, equally significantly, for the commercial and residential mortgage markets. At this juncture it is worth repeating that while the Federal Reserve Bank’s Open Market Committee (“FOMC”) has control and indeed discretion over overnight money market rates (commonly known as the Fed Funds Rate), yields in the bond market are determined by investors, partly based on the supply and demand of debt. In my last write-up, I cautioned our clients on the trajectory of our nation’s Federal budget deficits, suffice to say, in years when employment and growth have been strong, our policymakers have still been running up $1+ trillion deficits. As a result, increasing levels of US Treasury bonds are being issued to finance the deficit and the nation’s debt to GDP ratio (a measure of solvency) is rising at a rapid rate. Thus, it is prudent to assume that long-term interest rates across wide sectors of the credit markets may remain elevated (much like mortgage rates) since every credit instrument is priced at a risk premium to US Treasury notes and bonds. In summary, even while the FOMC cuts short-term rates, we do not expect commensurate declines in the rates that determine corporate borrowing or indeed our household mortgage rates. The increased debt servicing costs, both at the government and the private sectors, act as headwinds to business investment, consumer spending and government spending to stimulate the economy going forward relative to the past few decades. As such, we have a cautious outlook for the performance of risk assets and would like to remind our clients of the projections we derived last month – please see the table below.