Stephen: Welcome back to the Smart Money Show. I’m your host Stephen Rischall, and I’m joined today by my co-host, Chris Carter. In this episode, we’re diving into some financial insights from the first two months of the year. It’s been a period of time that defied expectations and set new records. Chris, February was quite the month for markets, wasn’t it?

Chris: Absolutely, Stephen. After a very strong 2023, the first two months have been solid in the markets, and most of those returns were in February, year to date through the end of the month. The S&P 500 led by the growth stocks once again, was up around 7%. February showed us that equities can thrive even when yields are rising, provided it’s for the right reasons, like stronger growth. It’s been a testament to the resilience of the market and the underlying strength of the economy.

Stephen: That’s for sure. Fourth quarter earning season was showing some strength, and it seems like there’s been a bit of a reacceleration underway. Chris, can you share more about what that means for stocks moving forward?

Chris: Sure, Stephen. Because the rally in stocks since last year has been primarily driven by an increase in valuations, we think that further gains will likely have to come from an increase in corporate profits. The good news is that with most of the S&P 500 companies having already reported their fourth quarter results, the blended year over year earnings growth was around positive 4% for 2024. So for the entire year, the street estimates are for about 11% growth, which is healthy. Much of that is driven by the magnificent seven, mega cap tech companies. But results have surprised positively across the board for sure.

Stephen: Yeah, and it seems like we might be seeing a broadening of leadership in the market, away from those handful of stocks. That’s probably a good thing. It’s a healthy thing. This is something that we talked about earlier this year at our client event. Chris, where do you see opportunities for diversification moving forward?

Chris: That’s a great question. If and when those magnificent seven stocks lag the market, it does open up opportunities to diversify your equity positions. So we are currently looking at value style investments, mid cap, small cap stocks that have been overlooked and it’s a chance to spread out and potentially capitalize on different market segments.

Stephen: I see. Now, despite these gains in stocks, bonds actually declined for the second straight month here to start the year. So, Chris, what do you think, does this offer a good entry point for investors in bonds or are we not there yet? What do you think?

Chris: Definitely, the rising yields presents an opportunity for investors to consider extending duration. It’s a chance to rebalance allocations from shorter duration bonds to intermediate bonds, which we are currently implementing in our portfolios. So the Bloomberg aggregate bond index is down about 1.7% for the year as of the end of the month. We’re happy to say most of our bond portfolios are up fractionally. We feel that extending this duration will continue to make sense, especially as we anticipate the Fed to start cutting rates later this year.

Stephen: That’s valuable insight. Let’s talk a bit about inflation and interest rates. I mean, that really dominated the conversation the past couple of years. We’ve seen a lot of data come in already the last few months here. And I wanted to mention Chris, I think usually people focus on CPI, the consumer price index. But the Fed’s preferred gauge of inflation is PCE, the personal consumption expenditures. So, what does all this mean?

Chris: That report, the PCE, that personal consumption expenditures is a very important report because it’s the one that the Fed really does favor to look at when they’re trying to make decisions about the future of rates. It is their favorite inflation indicator. Fed Chair Powell has made it clear that the Fed still wants to see the core PCE reading in this report to be at 2% on an annual basis. The report showed that the PCE rose 0.3% in January and is up 2.3% in the past 12 months. Core PCE excluding food and energy increased 0.4% in January, and it’s up 2.8% in the past 12 months. That was the largest monthly gain in the year for Core PCE, but it did fall in line with the economist expectations. However, prior to that report, the six month annualized rate for PCE was below the Fed’s 2% target for two months in a row, with the latest monthly reading. The six month reading is now at two point a half percent.

Stephen: Let’s talk about that for a moment. We’ve seen a bit of a shift in the market expectations because of this, right?

Chris: Yes, one of the big shifts that’s happened in the market recently has been the Fed funds rate. The futures markets are now in alignment with the FOMC’s dot plot, both suggesting three rate cuts in 2024. Now, the dot plot is the Fed being transparent about where they see rates in the future. And this is in comparison to the beginning of the year when futures markets were pricing in six rate cuts. So now we’re expecting about three. But as economic data has continually come in stronger, the markets have deferred to that Fed’s guidance. So now where do we stand? I just looked this morning and now about 20% of economists think that the first rate hike will come after the May meeting. The majority of economists believe the rate cuts will begin with the June meeting and with a few others during the year, it’ll end the year around 75 basis points lower to a range of about four point a half to 4.75%. The Fed rate cuts could indeed prolong the expansion and drive further gains. However, we should brace for choppier markets in the short term, the expectations are really high and any shifts in policy will be closely watched by investors for sure.

Stephen: Absolutely. Chris, it’s been a period of rising markets and low volatility something investors really dream of. So I know most of our clients are certainly happy about that one. But as we’ve seen, markets don’t move in a straight line. They shouldn’t do that. So, Chris, any final thoughts for our viewers on how to navigate the months ahead?

Chris: My advice would be to stay informed and diversified like we say quite often. And while the outlook is positive, being prepared for that potential volatility is key. Diversifying the equity positions and considering extending duration in the fixed income portfolios can certainly help navigate what’s going to come next.

Stephen: Thank you, Chris, for those insights. And thank you to our viewers for tuning in to this episode of the Smart Money Show. If you’ve thought this information was useful or helpful, feel free to share with your friends because they might have some of the same questions that you do. Until next time, I’m Stephen Rischall, and that’s Chris Carter. And this is the Smart Money Show.