Market Commentary

Monthly Financial Markets Commentary — February 29, 2024

Stocks advanced strongly in February, as glamour stocks with the highest market weighting continued their ascent. The consensus on Wall Street is that the Federal Reserve Bank has engineered the proverbial "soft landing", slaying runaway inflation with little or no damage to the economy. Bonds have declined modestly in the new year as interest rates have risen.

Breadth in the market has become even more narrow with the "Magnificent Seven" (Microsoft, Alphabet, Amazon, Nvidia, Facebook, Apple and Tesla) shrinking to the Magnificent Six or even Magnificent Four. Apple, Google and Tesla have all performed poorly in the new year. These headlines are somewhat misleading, however, and focus much of the attention on whether the Magnificent Seven are or are not significantly overvalued. Just below the Magnificent Seven are several groups of stocks that are also quite expensive by historical standards, including what have become glamour stocks in the healthcare, technology and and even consumer staples areas.

By traditiional measures these stocks are overvalued but investors view them as safe, since they have risen the most and not endured significant long-term losses. Narrow breadth is normally a harbinger of market turbulance, as investors have piled into the same stocks and tend to exit those positions in disorderly fashion when trouble arises. The equal-weighted S&P 500 Index has returned far less than the cap-weighted S&P 500 Index, demonstrating the disproportionate effect of these stocks. By historical measures, such as price-earnings, price-to-sales, market-cap-to-GDP, Schiller CAPE Ratio, stocks are overalued.

For 2024 the S&P 500 Index, the capitalization-weighted broadest measure of U.S. stock market performance, has returned 5.33%. The Nasdaq Composite Index, another capitalization-weighted index, but more reflective of growth stocks, has returned 6.18%. Finally, the Dow Jones Industrial Average, a price-weighted index, has returned 3.80%. All returns are on a total return basis in that they include dividends.

The Morningstar U.S. Aggregate Bond Index, a broad measure of the U.S. bond market, has returned -1.70% for the year, as interest rates have risen modestly in the last two months. Investors still believe that Fed Chairman Powell will cut rates soon, although there is less conviction given recent signs that inflation may be picking up. There are several trends that do not auger well for interest rates in the coming year. First, the Fed is well into its program of "quantitative tightening", which drives up interest rates through an increase in the supply of government bonds. Second, the government is running gargantuan deficits and it is unclear exactly who the buyers of all this newly issued debt will be (probably not China or Japan, the traditional buyers of U.S. government debt). On the other hand, there is little doubt that if the economy does falter, or if the banking sector should suffer another meltdown, the Fed will ride to the rescue with cessation of quantitative tightening and a reduction in short-term rates.

The sectors in the equity market that have performed the best in 2024 are Financials, Healthcare and Information Technology at 6.1%, 6.6% and 8.9%, respectively. Materials, Real Estate and Utilities have fared the worst at .8%, -4.0% and -2.4%, respectively. The underperformance of Materials may reflect some continued softness in the economy, despite all the talk of the Fed engineering a soft landing. Utilities are usually negatively impacted by higher interest rates, which have trended up in 2024.

The comparison of current price/earnings ratios and dividend yields as of February 29, 2024 to those of the prior year is as follows.



Prior Year*

S&P 500




Dividend Yield (%)



Dow Jones Industrial Average




Dividend Yield (%)



* based on 12-month trailing data

Since earnings estimates have generally not advanced, the increase in valuation of the indices is entirely driven by investor enthusiasm. Analyst estimates for 2024 earnings per share have been falling for months, conveniently allowing most companies to easily beat the "consensus estimates". Falling dividend yields are a telltale sign that valuations are stretched, as companies only increase dividends if they are quite confident in earnings estimates.

Current national average CD deposit yields for one-year, two-year and three-year instruments are 4.65%, 4.05% and 4.00%, respectively. This class of investments now offers competitive yields.

Gold and crude oil most recently traded at $2.056.20 and $79.50, respectively, compared to $1,845.15 and $78.75 one year earlier. Gold has risen in reaction to global political instability and increased holdings by all central banks; crude oil has risen in line with estimates of quickening global demand and evidence of exhaustion of shale-oil deposits in the United States, which have been responsible for almost all the growth in oil production over the past few years.