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Rally rest stop – not a correction — Week of March 18, 2024


No change in the Walls of Worry: inflation, stagflation, slow down, etc.

indexwtdytd1-year3-year5-yearindex level
S&P 500 Index-0.097.6331.2510.5914.515,117.09
Dow Jones Industrial Average0.013.2222.617.8310.7538,714.77
Russell 2000 Small Cap-2.020.8916.90-2.927.002,039.32
NASDAQ Composite-0.686.5837.476.7116.7615,973.17
MSCI Europe, Australasia & Far East-1.304.4820.864.627.562,325.12
MSCI Emerging Markets-0.121.4213.22-5.772.401,034.74
Barclays U.S. Aggregate Bond Index-1.23-1.721.63-2.800.412,124.79
Merrill Lynch Intermediate Municipal-0.21-0.113.67-0.201.79314.52

As of market close March 15, 2024. Returns in percent.

Investment Insights

 — Steve Orr 


Get ‘em while they are hot — only 10 more trading days left this quarter. Is the AI meme over? It is starting to feel like it. Looking at fund flows makes us wonder. Instead of buying gold and the Magnificent 7, the fast money has run to the new bitcoin exchange traded funds. The S&P 500 did touch a new high last Tuesday, but no other U.S. indices joined the party. Most of that day’s climb to new heights was driven by Oracle’s 11.8% jump, after the firm reported big gains last quarter in its cloud unit.

The other four days of last week fit our “tired rally” theme. Added together, the index dropped —1.2% versus Tuesday’s 1.1% gain. The Dow Industrials have slipped lower each of the three weeks in March. The NASDAQ and S&P 500 have put up occasional bursts like last Tuesday but have finished lower the past two weeks. One side note is how Europe, and some Emerging Market stock markets, outpaced our indices. They are still well behind our index returns this year, but the prospects of interest rate cuts by the European Central Bank are stirring interest over there.

Two weeks and less than a half of a percent drop is not a trend change. They do mark a reasonable pause that comes after earnings season. Think chopping sideways as opposed to a correction. Last Friday was quarterly expiration for futures and options, so plenty of quarter-end shuffling crossed the tape. The first quarter earnings season is exactly a month away. Friday, April 12, is the unofficial start with several mega banks reporting. We maintain our moderately bullish outlook for this year but have our rain jackets ready. 

Bit & bond 

So, what is going up on our side of the pond? Rates and bitcoin top the list. More specifically fund flows into bitcoin exchange traded funds. Recall that the SEC granted permission for nine ETFs to trade in bitcoin and their futures back in January. There are now 10 in the Bloomberg ETF database. Since then, investors, or speculators if you like, have driven the group’s assets from zero to $58 billion, according to Bloomberg. All that new money has helped propel spot Bitcoin from the low $40,000 area to a peak of $73,157 last week. It settled Friday in the low $62,000 area.

An easy explanation is that these folks are leaving the crypto exchanges for the easier- and cheaper-to-trade ETFs. Another possible group are those who want to move away from gold, for a variety of reasons. The yellow metal does lack excitement but has a pretty good history through thick and thin. Gold’s chart has a very similar pattern to Bitcoin’s this year, but only rising 4% versus the supply-constrained (and halving) Bitcoin’s 60% run. Gold and Bitcoin moving higher along with stocks when inflation is not going down has our attention. Watch gold’s price action in here.

Steady but slowing economic news continues to frustrate the bond world. U.S. Treasury 10-year notes fell to 3.8% late last year on hopes of multiple Fed rate cuts. The Fed’s battle against inflation is not over, and that realization has kept bond returns in the red. Ten-year notes now change hands at 4.3%, and the trend to higher yields appears to have legs. A projected deficit of around $2 trillion dollars this year means Congress will tell the Treasury to keep issuing more paper. With too much supply, which way do prices go? 

Still here

Another factor pressuring bond yields is persistent (“sticky”) inflation. Yes, inflation is still here, running at a 3.2% headline pace. Stripping out gas and food (who needs them anyway?) yields a housing-led rate of 3.8%. In other words, well over a percent above the Fed’s 2% target. Over the past three and six months, both the headline and core averages have turned higher. Housing prices, rent and used cars have contributed to higher readings.

Rent continues to run at a +5% rate, and it makes up 43% of the “core” CPI. Bespoke reports it is responsible for two-thirds of core inflation over the past 12 months. Clearly, supply and demand for rentals varies across the country; as we mentioned recently, we are seeing rent specials in the metroplex for the first time in years. Gas prices were flat in March, so that should lower the headline rate in next month’s CPI reading.

If the economy slows to a 1.5% growth rate in the next several months, we expect pricing pressures to bring inflation just below 3%. Enough for the Fed to declare victory and start lowering rates in June? We doubt it. 

Fed up

This Wednesday, the Federal Open Market Committee will conclude another two-day policy meeting. The Fed meets about every six weeks. This meeting is one of four when the Committee releases its updated forecasts and estimates. There is a small possibility that the Committee’s median number of rate cuts for this year could fall from 3 to 2. A small chance but not zero. December’s forecast of three quarter-point rate cuts in 2024 helped drive the current stock rally and pushed 10-year Treasuries briefly below 3.8%. That euphoria has largely abated in the face of sticky inflation.

Last Saturday marked the two-year anniversary of the start of the Fed’s current hiking cycle. The press release and Chairman Powell’s press conference will likely focus on “inflation fight not over.” We expect the Fed to leave rates unchanged for most of this year.

Central banks getting ahead of the Fed are not helping either. The European Central Bank is making noises about cutting rates to stimulate their recession economies. Falling euro bond yields would entice total return accounts away from U.S. bonds. Last week, Japan’s unions won a 4% wage increase. This marks the largest increase in 40 years for workers. Traders are thinking that higher wages will help the Bank of Japan end their policy of negative interest rates. Higher interest rates in Japan may lure some investors away from Treasuries. 


The headliner stocks are indeed taking a break. Of the Magnificent 7, only NVIDIA, Microsoft and Alphabet are in the green this month. Interest rates are rising again, thanks to sticky inflation. Retail sales and manufacturing output remain at solid levels but are on a glidepath lower. Our dashboard remains green, but in neutral, not leaning one way or another. Onward to the Fed meeting. 

Steve Orr is the Managing Director and Chief Investment Officer for Texas Capital Bank Private Wealth Advisors. Steve has earned the right to use the Chartered Financial Analyst and Chartered Market Technician designations. He holds a Bachelor of Arts in Economics from The University of Texas at Austin, a Master of Business Administration in Finance from Texas State University, and a Juris Doctor in Securities from St. Mary’s University School of Law. Follow him on Twitter here

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