Have you ever looked at something, perhaps a specific situation, and at first saw nothing out of the ordinary or unique, or maybe not even anything at all?  But, before long, due to more information, or a different perspective, or more thought, or perhaps education, what first appeared to be nothing, all of a sudden something appeared almost magically out of thin air.

Maybe you recall this literally happening when you were a child. Remember using lemon juice and paper to write out a secret message?  Once the writing in lemon juice dried, when observed carefully, one could possibly see a slight change in the texture of the paper but couldn’t detect any actual message or meaning.  However, after holding the paper above a burning candle, or even an illuminated lightbulb, the message could then be seen. 

In some ways, we believe there are several things in life and specifically within investing that don’t jump out, or become visible until further analysis, experience,  or additional study.  One such event has occurred over the last few months. 

Since late last year, a number of economists were calling for the Federal Reserve to cut rates significantly more than the Fed suggested it thought it needed in its Dot Plot Survey shown in its Summary of Economic Projections.  In the latest release back in December, the FOMC (Federal Open Market Committee of the Federal Reserve) showed that policy makers projected needing to cut rates three times totaling approximately 75 BPS in 2024, or three-quarters of one percent.  Yet many Wall Street economists were calling for as many as 6 - 8 cuts in 2024.  This didn’t make sense unless reading between the lines.  Apparently the economists thought the economy was slowing at a greater rate than did the Fed officials.  Perhaps those same economists were calling for a so-called “hard landing.”

More recently, however, it seems many economists are now closer in line with Fed guidance.  Why the change?  One logical reason is that now Wall Street economists are seeing greater strength in the economy.  When the economy is strong, not as many cuts – either the number nor the magnitude of cuts is necessary to spur the economy.   Why does this matter?  In general, the economic backdrop influences corporate earnings.  Those earnings influence stock price over time.  Earnings appear to be improving for corporate America, specifically components of the S&P 500.  In fact, per FactSet, the Street consensus suggests that S&P earnings will increase by 11% in 2024.   Furthermore, using a bottom-up approach, the price target for the S&P 500 for the year is some 9% higher than today’s close.

The economy is likely stronger than many realize.  However, it may not be so strong that cuts aren’t warranted, altogether.  It simply suggests that perhaps inflation will finally come down to a desired rate and tighter monetary policy is no longer needed to slow the economy in an effort to tame inflation. 

Just as one could read a message from their buddy when they were a kid by getting out the candle to view what appeared to be a blank piece of paper, we can infer messaging by looking at the outlook for rate cuts.  On March 20, the FOMC will release its new Summary of Economic Projections.  Will it still suggest approximately three rate cuts of 25 basis points each during the remainder of 2024, or will it show something different?  Furthermore, will economists hold to the three-cut projection, or might they also update their numbers?  Time will tell.  And when the reports are out, we’ll attempt to take a deeper look with hopes of further direction and clarity.

A few random thoughts.  Some are likely worthy of elaboration in the future:

• February, normally the second worst performing month of the year in the equity markets, was quite robust this year. 
• Corporate earnings appear strong.  
• AI is revolutionary.  Likely resulting in increased productivity, efficiencies, and ultimately higher earnings.
• Trees don’t grow to the sky -  Record highs for the S&P, Nasdaq, DJIA, international markets.  Even Japan hit a record high last set in 1989.
• The stock market is slightly expensive.  But, not so expensive we are recommending changes unless one is in need of cash, or risk parameters have changed.
• The average intra-year mean pullback is nearly 15%. 
• Commercial real estate could be concerning – especially for regional banks.  Could this potential issue represent something larger at hand?
• Potential government shutdown – in the coming days / weeks.  So far, kick it down the road policy. 
• Geopolitical concerns causing further uncertainty.  Risk of escalation.
• Concentrated rally.  Broad-based rallies are typically viewed as healthier and more robust.
• Berkshire Hathaway cash stockpile. 

If you haven’t tried the lemon, paper, and candle trick in a while, or even in decades, perhaps a young person in your life would enjoy the experiment with you.  Who knows?  There might even be a teaching moment in there.

Thanks for allowing us the walk down memory lane!