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Bull was running; now trotting — Week of March 4, 2024


Momentum justifies higher returns later this year

indexwtdytd1-year3-year5-yearindex level
S&P 500 Index0.997.9731.0911.6114.755,137.08
Dow Jones Industrial Average0.004.0920.979.7910.8139,087.38
Russell 2000 Small Cap3.002.6110.82-1.086.892,076.40
NASDAQ Composite1.768.5543.187.6817.4916,274.94
MSCI Europe, Australasia & Far East-0.062.4615.154.587.332,285.97
MSCI Emerging Markets-0.66-0.087.32-6.462.221,020.94
Barclays U.S. Aggregate Bond Index0.08-1.684.24-3.140.602,125.60
Merrill Lynch Intermediate Municipal0.10-0.224.95-0.011.86314.20

As of market close March 1, 2024. Returns in percent.

Investment Insights

 — Steve Orr 

Leaping returns

Two months into 2024, and stocks are off to a very good start. The S&P 500’s 6.7% gain through the leap day at the end of February is the third best in 20 years and the second best since 2019. The trend is your friend, and right now the trend is positive. The Dow Industrials, NASDAQ and the S&P 500 have all made repeated new highs over the past several weeks. Even the S&P 500’s 200-day moving average finally set a new all-time high last week. The 200-day moving average setting a new high tells you that a Bull is firmly in place. Bespoke Research points out that following new highs in the 200-day moving average returns can be positive but so-so. This makes sense as all big moves tire out and markets need time to rebuild energy. Ned Davis points to 16 cases when the S&P 500 has posted positive returns for the four months ending in February. In all 16 cases, the big index finished the full year with solid gains. We would be happy with average “solid” returns for the rest of the year.

This Bull run looks long in the tooth to us. That is an easy statement to make when returns are positive 16 of the past 18 weeks. That ties a record run last seen in 1971. That’s technically pre-disco for you Millennials. On a relative strength basis, all the big indices are in overbought territory. Valuations are above average but only a few of the tech stars are at nosebleed altitudes. Sentiment is the one drawback. The 24% rally in the S&P 500 since the October low has pushed enthusiasm for stocks back into the optimistic zone.

Not “foaming at the mouth” buying everything, but enthusiastic enough that these levels suggest muted returns in the coming 12 months. We would note that our commodity trading advisor and hedge fund friends appear to be over 100% net long. Taken together, they tell us to stay fully invested. If one has capital to put to work, our dashboard suggests waiting for a correction or looking to other areas. When the tape is going up, do not fight the tape. When the tape is going down, do not fight the tape. Not sure if we can be clearer on that point. 

2000 changes

The run by the Magnificent 7 (or 4) has been impressive. We are watching for signals from the small cap world. If the shutdowns of four years ago accomplished anything, it was to mess up business and economic cycles. Usually, small company stocks do well at the beginning of a recovery and lead the business cycle. Since February 2020, the Russell 2000 trails the S&P 500 by nearly a two-to-one cumulative return: 48.1% versus 85.4%. Although it may the “wrong” time of the cycle, if history repeats itself, small may be beautiful in the coming months.

The small index is still some 17% below its all-time high from November 8, 2021. But recovery starts with one new high at a time, and last Friday the index posted its second 52-week high in five months. There are 13 instances when the Russell 2000 has reached a new 52-week high since 1980. Excepting the most recent highs of December 19 and last Friday, the prior 12 cases saw the index higher 11 times. Of those 11, 10 were double-digit gains. History, repeat thyself. 


What does it take for stocks of all stripes and sizes to continue to rally? Investor enthusiasm plays a part, but some of the reasons big players are fully long may not be readily apparent to those of us in the cheap seats. Liquidity plays a huge roll in the direction of stocks. When money is readily available and cheaply priced, stocks do well. When conditions are getting tighter, stocks usually turn south.

Free reserves in the banking system can be thought of as funds the bank holds above reserve monies required by the regulators. M2 is the U.S. money stock of currency, checking accounts and savings. Both have risen well above their historic averages after Congress distributed money directly into taxpayer pockets over the past four years. Spending by Congress under the Inflation Reduction Act and CHIPs is just starting to wind its way through the economy. The amount of interest paid by corporations above U.S. Treasury rates is one type of credit spread. Many of the largest borrowers are in good financial shape and command a relatively small spread above Treasuries. High-yield or junk borrowers can also borrow relatively cheaply. Our indicator dashboard tells us to get interested in high-yield around 5.5% spread above Treasuries. At the moment, high-yield is around 3.3%, or a bit expensive for our portfolios.

These are just a few of the data points that can be considered financial conditions. You can find them on the web in “financial conditions index” papers. Good bedtime reading. The point for us is that money supply, banking reserves and credit spreads are important fertilizers for stock market growth. The most talked about pieces of the conditions puzzle are the Fed and its effects on short-term interest rates. The Fed raising rates from one-quarter of a percent to the current range of 5.25% to 5.5% should (does) have the effect of lowering liquidity. In a direct counter to the Fed, Congress and the administration have made money readily available through shutdown support and the Employee Retention Credit. Corporations can easily borrow and demand lower than usual spreads to do so. Stock traders like these conditions and believe they contribute to more investor enthusiasm. 


An impressive start to the year, to be sure. Stock rallies have a life cycle, and our charts suggest a breather is in order. Recent momentum through February should carry through the end of the year. We do expect some bumps along the way and that small cap stocks should garner some attention in the coming months.

Rates will remain at about these levels longer than Wall Steet wants. A decent economy rolling along in 2nd gear should post about 2% growth this quarter. The consumer is definitely spending less than in 2023. This Friday’s job report should buttress that view with any growth in jobs coming from non-native workers and service industries. 

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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