Equity markets continued to climb in February. US stocks, both large and small, led the way with mid-single digit percentage increases. Outside the US, emerging market stocks were not far behind, while developed markets were a relative laggard. America’s outperformance is a continuation of a trend that started after the Great Financial Crisis in 2008. US exceptionalism can be observed by the ever-increasing weight US stocks have in global indices, which for the MSCI All-Country World Index stood at 63%, up 20% or so from the low 40% range a decade ago.
In the fixed income market, interest rates crept higher leading to declines for investment grade borrowers. However, credit spreads for riskier borrowers remained tight, allowing high yield bonds to eke out a positive total return for the month. The tightness may be a bit of a head-scratcher, with the uptick in short-term interest rates hitting heavily indebted borrowers the hardest. From our perspective, we expected that market to tighten more than it has, but there is still a lot of capital committed to the space that is chasing returns.
The equity market seems to have been oscillating between narrow and wide leadership of late, in both directions. More companies are hitting 52-week highs, but we are lapping last March’s regional banking crisis as we speak. In 2023, a group of stocks dubbed the “Magnificent Seven” attracted much of the market’s attention. As 2024 has developed, the Magnificent Seven has lost a few members and the remaining constituents have been rebranded by financial media as the “Fabulous Four”. We struggle to find market participants who seriously question the business prospects of the media darlings but remind readers that narratives and valuations can change quickly.
Outside of the new Fab Four, sentiment is more of a mixed bag and from our long-term perspective, that’s not so bad. Valuations and expectations seem more balanced, particularly if the economic backdrop is one where growth is reasonable, and inflation continues trending in the right direction. Perhaps that’s a big “if”, but as of today it seems like a reasonable enough base case.
