Market Update February 2024: Trends and Analysis

By: Grant Johnsey, Head of Client Solutions, Capital Markets, Americas

This week has been a busy one in the markets.

In fixed income markets, credit valuations remain rich. Investment grade corporate bond spreads are hovering around 100bps, which is about the tightest since 2022. Our fixed income desk is seeing investors do some pruning within portfolios and moving up in quality. Much of the market appears to be doing the same: CCC spreads on a YTD basis are almost 100bps wider than the end of December (see graphic), whereas BB spreads widened by less than 10bps. This comparison illustrates the improvement in quality from a technical standpoint. Investors have also continued the trend of increasing duration. Fund flows into credit funds remain very strong. For those investors that are multi-asset, yields in fixed income still look compelling with IG index at ~5%+ and HY at 7%+ presently.

Despite hitting an air pocket midweek due to NYCB's surprise loss and dividend cut, equity markets remained strong. The AAII bull/bear survey indicated that retail investors, who own over 50% of the US equity market, have turned more bullish. Mega Cap tech, AI, and GLP-1 Pharma stocks all performed very well to start the year.

Gold buying by central banks around the world, especially in emerging markets, has continued. Gold has hit highs across nearly all major currencies this past month including Euro, Pound Sterling, Yuan, Aussie Dollar, Yen, and Korean Won. Even retailers like Costco are into gold nowadays. Gold still looks poised to trend higher.

Economic data continues to surprise to the upside. In addition to a good jobs report, US construction spending in December was 0.9% higher m/o/m vs 0.5% estimated. ISM PMI improved in January hitting 49.1 vs 47.2 est. The Atlanta Fed's GDPNow model estimate for Q1 growth revised up to 4.2%.[1] It's hard to find a lot of negative surprises to start the year, although insider selling levels remain elevated.

Yet markets continue to expect the FOMC to cut rates soon and aggressively. The odds of a March cut, once projected at a 90% probability, have fallen below 50%. The market still projects 1.25% in total cuts in 2024. The last time that the Fed cut rates by 125 bps in a 12 month period when the economy was NOT in recession? You have to go back to 1985/6!

Please reach out to speak to our capital markets experts in the equity, fixed income, and derivatives desk.

[1] GDPNow - Federal Reserve Bank of Atlanta (atlantafed.org)