February 2024

January 31, 2024

It was a really good month, until it wasn’t.  We started the year off very strong, stronger than I expected and was very pleased with my performance.  The economy “seems” to be doing ok.  Economic indicators are all pretty stable, with some blips on the international stage, and the unemployment rate is almost to pre-COVID levels.  The main issue is inflation right now. The official rate is still at 3.4%, unofficially some statisticians have it at ~8%.
 
Two items turned a good January into a mediocre January (the mutual fund returns above do not reflect trading on the 31st, but the results are not hard to predict).  

First, Alphabet (why well-known companies change their name to something less well known is a question for their marketing department), aka Google, took a major dive this week based on lower than expected advertising revenue, down over 7% today.  Alphabet is a significant component in the S&P 500 and any downturn in that stock of any significance will translate into major losses for the index.  I will not go into the fundamentals of why they are missing their advertising revenue here, but I think it is important to keep in mind the importance of diversification for companies on the cutting edge of technology.  They must continue to innovate to stay relevant or they risk losing in the long run (e.g., Yahoo).  Alphabet is doing that, but advertising is still a significant portion of their raison d'être.

Second is the Federal Reserve (yes, them again).  In their first meeting of the new CY, they indicated less of an intention to start lowering interest rates until inflation comes down to the targeted rate of 2%.  Much of the rise of the market over the last couple of months has been due to the expectation of rate cuts, possibly as many as three this year.  Recent statements call into question the possibility of a rate cut in March and the market reacted.  I think most investors who follow the market on a day-to-day basis were expecting this news-inflation, both official and non-official is still high.  Additionally, we have other inflationary pressures from across the globe and possible pre-recessionary conditions (could I qualify that any more) in Asia, especially China (see Evergrande liquidation https://www.reuters.com/business/embattled-china-evergrande-back-court-liquidation-hearing-2024-01-28/).  The longer the economy can stay healthy, inflation remains high, and unemployment stays low, the Federal Reserve will resist cutting rates.  Of course, there are other drivers that may cause a rate cut, but right now I think they want to keep their options as open as possible.

I still maintain my cautious pessimism for the year overall.  As an election year and as we are facing several global conflicts, I think we are going to see some turbulent times ahead.  I am still remaining strong on the S&P 500 and think it is the best option at the moment.  Individual drivers like Alphabet tend to recover after big days like this when people see a buying opportunity.

It’s the end of January and many just got a big pay increase.  If you can afford it, make sure you increase your contribution towards the limit!  Keep investing!