2024 Starts Strong with S&P 500 Up Double Digits in Q1
2024 has kicked off with the U.S. stock market experiencing remarkable growth, fueled by a combination of economic optimism, anticipated interest rate reductions, and excitement surrounding the potential of artificial intelligence. This has created a dynamic environment for stocks. So far, the S&P 500 has seen an increase of over 10% this year, marking its most significant first-quarter improvement since 2019. Achieving its first peak in two years by late January, the index has continually reached new heights, with more than a dozen records set without any major downturns. This bullish trend is largely attributed to investor confidence that the economy will achieve a "soft landing", a scenario in which inflation slows while avoiding a significant economic slump.
A March survey by BofA Global Research found that nearly two-thirds of fund managers anticipate this soft landing scenario over the next year, with only 11% foreseeing a "hard landing." Additionally, a recent dovish stance from the Federal Reserve which maintained projections of three rate cuts this year alongside an improved economic forecast has bolstered investor sentiment.
This optimistic outlook has led to relatively high stock valuations. The S&P 500's forward price-to-earnings ratio is now 21, the highest in over two years. A main question for Q2 and beyond is will the might of the AI wave be enough to continue pushing the market higher. As equity valuations reach overbought territory, calls for a market correction are starting to grow. Yet, investors could keep the good times rolling by bidding up shares of companies showing genuine utilization of AI technology outside of the mega-cap space. Capital flow following this pattern would serve to expand and diversify the major market force of AI going forward.
Baltimore Port Disruption Unlikely to Cause Significant U.S. Economic Impact
The Port of Baltimore is the 10th busiest in the country by twenty foot equivalent (TEU) container volume. The Port of New York and New Jersey is the second busiest behind only Los Angeles. Shipping container volume coming into the U.S. will likely be diverted north into New York and New Jersey or south into Norfolk where it can be easily absorbed.
Vehicular volume coming into the country does use the Port of Baltimore, but this volume tends to be specialized vehicles like large trucks, tractors, and wheeled cranes. Therefore, the volume disruption to consumer car and trucks is expected to be light.
Lastly and maybe most significant is the impact on thermal coal exports which mostly flow to India and China but also to Europe. The Port of Baltimore is the second largest hub for coal exports in the country; 27% of all U.S. seaborne coal exports exit via Baltimore according to Kpler, a ship tracking firm. The Port of Norfolk to the south handles the largest volumes of coal exports and is at capacity. Furthermore, a report from S&P Global indicates pricing impact on the coal market will be light because the market is well stocked.
Durable Goods Orders Rebound into Positive Territory
In February 2024, the United States saw a 1.4% month-to-month rise in orders for manufactured durable goods. This print surpassed the anticipated 1.1% increase and follows a revised decline of 6.9% in January. The improvement was led by a 3.3% increase in transportation equipment orders, a reversal of a -18.3% dip in the previous month. Other sectors also showed positive movements: machinery orders went up by 1.9%, fabricated metal products by 0.8%, primary metals also by 0.8%, and capital goods orders saw a significant recovery with a 1.9% increase after a -17.1% fall. When excluding transportation, new orders edged up by 0.5%. Orders excluding defense rose by 2.2%. Additionally, a key indicator of business investment spending, orders for non-defense capital goods excluding aircraft, increased by 0.7%, following a 0.4% drop in January.
GDP Revised Even Higher for Q4 2023
The US economy expanded an annualized 3.4% in Q4 2023, a slightly better pace than the 3.2% previously reported. Growth was supported by consumer spending and non-residential business investments.
Consumer spending was revised higher (3.3% vs 3% in the second estimate); services rose more than previously reported (3.4% vs 2.8%) while goods rose less (3% vs 3.2%). Non-residential investment was revised higher (3.7% vs 2.4%), and residential investment continued to grow although slightly less than expected (2.8% vs 2.9%). Government spending expanded more (4.6% vs 4.2%), but both exports (5.1% vs 6.4%) and imports (2.2% vs 2.7%) increased less than initially reported.
Core PCE Eases
In February 2024, the Core PCE prices in the U.S. saw a 0.3% increase from the month before, a match to expectations. This tape follows an upwardly adjusted rise of 0.5% in January. Compared to the same period last year, the core PCE prices climbed by 2.8%, a reading slightly below January's revised increase of 2.9%. Overall PCE climbed by 2.5%. Both annual numbers were in line with expectations. These data points leave open the possibility of the Fed cutting interest rates soon.
Personal Income Up Slightly
U.S. personal income grew by 0.3%; a rise of 0.4% was expected.
Personal Spending Pops
In February 2024, consumer spending in the US increased by 0.8% from the previous month. This tape marks the largest rise since January 2023. Growth was driven by a $111.8 billion upsurge in service expenditures. The boost in services spending was primarily in financial services / insurance, transportation services (led by air travel), and housing / utilities. Goods consumption also saw a rise amounting to $33.7 billion. Motor vehicles and parts, especially new light trucks, accounted for the majority of the increase. When adjusted for inflation, there was a 0.4% advancement in consumer spending.
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