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WEEK AHEAD
April 1-5, 2024
The strength of the recent market rally and economic fundamentals continue to underpin our tactical indicators, which remain bullish (100%).
March marked yet another milestone for equities, as the S&P 500 index delivered a robust return of +3.22%. This solid performance was underscored by a much-needed expansion and inclusivity within the market, as evidenced by the S&P 500 Equal-Weighted index achieving a monthly return of +4.46%, surpassing the S&P 500 index by 124 basis points. Notably, this outperformance did not stem from the Technology and Communications Services sectors, as observed in 2023. Instead, it was driven by seven sectors, with Financial Services (+4.81%), Industrials (+5.12%), Basic Materials (+6.29%), and Energy (+10.46%) leading the charge. However, it's worth noting that not all members of the Magnificent Seven emerged victorious in March, with only NVIDIA and Google securing a place in the winner's circle.
The gains witnessed in March were supported by the Federal Open Market Committee's (FOMC) consistent narrative indicating potential rate cuts in 2024 despite a modest uptick in inflation. Additionally, Thursday's Gross Domestic Product (GDP) report revealed a growth rate of 3.4%, which exceeded consensus expectations, while Durable Goods orders surged by 1.4%, surpassing consensus estimates. However, Core Personal Consumption Expenditures (PCE) prices, which rose by 2%, fell below consensus forecasts. Bonds, particularly long-treasuries, experienced volatility but posted modest gains, resulting in the Bloomberg US Aggregate index returning +0.56%, which helped alleviate the year-to-date loss to -0.78%.
Looking ahead, as companies gear up for first-quarter earnings releases, market participants will closely monitor economic indicators in the upcoming week, leading up to the next FOMC meeting scheduled for April. Key economic highlights include Factory Orders, ADP Employment Change figures, Unemployment Rate data, and Consumer Credit statistics, all of which will provide valuable insights into the Fed's monetary policy trajectory.
"Nominal wage growth has been easing, and job vacancies have declined. Although the jobs-to-workers gap has narrowed, labor demand still exceeds the supply of available workers. FOMC participants expect the rebalancing in the labor market to continue, easing upward pressure on inflation. The median unemployment rate projection in the SEP is 4.0 percent at the end of this year and 4.1 percent at the end of next year."
— Chair Powell's FOMC Press Conference, March 20, 2024.
Inflation Spotlight – Minimum Wages of Key States on the Rise, Again!
Despite the recent moderation in inflation, with the rate dropping to 3.2% in February from its peak of 9.1% in June 2022, it still falls short of the Federal Reserve's long-term target of 2%. A detailed analysis of the latest inflation report underscores that service-related costs experienced the most pronounced increases:
This rise can be attributed to two main factors: the tight labor market and the escalating cost of labor, particularly hourly wages. With the unemployment rate only at 3.9% and the labor participation rate still below pre-pandemic and the long-term averages, it will be costlier for employers to fill positions.
Despite the federal minimum wage remaining stagnant at $7.25 per hour since 2009, data from the Economic Policy Institute reveals that since 2014, 28 states and the District of Columbia have revised their minimum wage laws, often surpassing the federal standard. Conversely, 20 states (Alabama, Georgia, Idaho, Indiana, Iowa, Kansas, Kentucky, Louisiana, Mississippi, New Hampshire, North Carolina, North Dakota, Oklahoma, Pennsylvania, South Carolina, Tennessee, Texas, Utah, Wisconsin, and Wyoming). continue to adhere to or fall below the federal minimum wage of $7.25.
Of the top five states boasting the largest economies by GDP (California, Texas, New York, Florida, and Illinois), only Texas maintains a minimum wage of $7.25 per hour. California and New York, in contrast, have minimum wages well exceeding $16 per hour. Additionally, a new law in California, effective April 1st, 2024, mandates a minimum wage of $20.00 per hour for all "fast food restaurant employees." This could potentially lead to job losses or increased consumer prices.
Remarkably, excluding Texas, the minimum wage in these top five states has increased annually over the past five years, outpacing inflation. If the cost of labor to deliver services and goods continue to rise, it only leaves lower demand and possibly job losses to lower inflation. It appears there are multiple forces at work (i.e. President’ Biden’s 2025 budget proposal and State-level minimum wages) thwarting the Fed’s monetary policy to lower inflation and once again, it is less about when inflation will fall, but a matter of how long inflation will remain inflated.
Source: https://www.epi.org/minimum-wage-tracker/#/min_wage
Advisory services offered through Sowell Management, a Registered Investment Advisor. The views expressed represent the opinion of Sowell Management. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and non-proprietary sources that have not been independently verified for accuracy or completeness. While Sowell Management believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and Sowell Management’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements. Investing in securities involves risks, including the potential loss of principal. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles, or from economic or political instability in other nations. Past performance is not indicative of future results.