Andrew Pyle
March 01, 2024
February rally wasn't such a leap
U.S. election cycles are already long enough, but it’s even worse when you consider that all presidential elections are held on a leap year. Yet one more day to listen to poll results and political banter. Perhaps this was the real reason why elections were started on a leap year and took place every four years. An interesting tidbit though. While elections do run every four years, they don’t always end up on a leap year. That’s because in a century year, the number has to be divisible by 400 for it to be a leap year. For example, 1900 was not a leap year but we had an election and 2000 was a leap year. The next time an election is held on a century leap year will be 2400.
Having one extra day in February can sometimes equate to one more day of strength for stocks, but it can work the other way too. Over the past 100 years we have had 25 leap years. Not every February in those years delivered the extra trading day and that is because some years the 29th is on a weekend. That happened in 7 of those years, where we had 19 trading days – no different than any normal February (accounting for President’s Day). The ones where the 29th falls on a weekday, we had 18 trading sessions. For those 18 years, gains and losses for February were evenly split.
Well, this leap year we had 20 sessions, and that extra day of trading helped the S&P500 to its best leap year gain over this period, with a lift of 5.2%. This has propelled the index to a year-to-date increase of 6.8% - almost double that of the Dow and just under the 7.2% rally in the NASDAQ. By comparison, the TSX ended February with a year-to-date gain of only 1.9%, though the European benchmark rose 7.9% and Japan’s Nikkei soared by more than 17%.
Now, given how close the results were for the broader S&P and the NASDAQ, you may think that this was once again the result of an exuberant tech sector. True, we have seen some impressive results, but tech was the fourth best performer in the S&P last month. The largest gains were in consumer discretionaries (+8.6%), industrials (+7%), and materials (+6.3%), with the tech sub-index up 6.2%. Even more importantly, there were no major groups in the red in February. We refer to this as the market having strong breadth and it’s not exactly what investors thought was going to transpire given the many headwinds out there. By comparison, the TSX saw only six sectors advance in February (led by healthcare, industrials and consumer staples), while we saw weakness in communications, utilities, materials and tech.
In a nutshell, the buoyancy of the U.S. market last month was the product of two things - a continued healthy fundamental backdrop for the economy and market participants coming to grips with the fact that central banks were not going to be in a rush to lower interest rates. As we discussed on our last conference call, it has been investor expectations around monetary policy that have been volatile, not the actual fundamentals or central bank guidance.
Data since the start of the year have supported both the view that North America’s economy is still growing and that inflation continued to ebb, albeit at a much slower pace than what we witnessed last year. The combination of the two have cemented a view by the Bank of Canada and the Federal Reserve that cutting rates now would be premature and that the pace of cuts, once they begin, doesn’t need to be aggressive. Back in December, investors thought that we would see six quarter-point declines in official rates over the course of 2024, even though officials were penciling in half that. Well, today, the market is back in line with the guidance of modest easing.
True, the initial realization that money wasn’t going to get cheap overnight did introduce some wobbles to the market, but the fact that we just came out of an impressive February at the same time that investors walked back rate expectations shows that the street has adapted to a normalization in growth, inflation and likely central bank responses to that normalization. This has been aided by the data for sure. The latest GDP figures for Canada and the U.S. show no sign of a recession as of the end of last year. The U.S. grew by 3.2% in the fourth quarter (a one-tenth downward revision from the initial estimate) and Canada’s economy expanded by 1% after a revised 0.5% contraction in the third quarter (original estimate was minus 1.1%).
More recent sentiment measures for businesses and consumers do suggest that economic activity might moderate over the near-term. The Conference Board Consumer Confidence index for the U.S. slipped last month to a reading of 106.7, but still remains well above the lows set since the Fed started raising interest rates. As I mentioned on the last call, Canada’s consumer confidence reading has also held up despite talk of a weakened economy. Also, a measure of business sentiment put out by the Canadian Federation of Independent Business rose in February for the third straight month, back to levels seen last summer.
On the inflation front, the data has shown a moderation in the pace of retreat, but we are not getting numbers that are overly worrisome either. Case in point, January’s U.S. personal consumption deflator, or PCE, came in largely in line with street expectations. Investors had feared that the headline would have been bad after the uptick in the January CPI, so this was also a bit of a treat on leap day.
The other reason why the equity performance in February was impressive is that the latest earnings season wasn’t anything to write home about. In terms of the S&P500, the last quarter delivered adjusted earnings per share that largely beat market estimates. The average percentage beat was 7.3%, which is lower than what we saw in the previous two quarters, but well above the results from 2022. The percentage surprise on revenues, however, was fairly weak at about 1.2% - just marginally better than the anemic third quarter. For those companies that missed street estimates, their shares were punished last month, but we also saw strong rallies in those that came in better than anticipated.
In Canada, the picture has been less impressive this past quarter. Only four sectors saw earnings that were ahead of estimates (energy, tech, communications and health care). Overall, there has been a 1.6% miss on earnings for the TSX, though we still have about 20% of companies left to report). Revenues were above estimates for the index overall, but much of this came from utilities and energy. The contrast with the U.S. pretty much matches what we saw in terms of equity performance last month, where the TSX had lost momentum relative to the S&P500. With the outlook for earnings likely to be relatively better in the U.S., in our opinion, this divergence could remain unless we see even stronger moves in financials and energy.
As we move into the last month of the first quarter, with the leap month behind us, the focus is going to shift back away from earnings and back to the data and central bank policy initiatives. If there are no negative surprises, then stocks do have an opportunity to extend gains, but we will invariably see at least some modest pullbacks as we work our way through the year. Anticipation of lower rates, even if they come a little later than expected, should contain the degree of those pullbacks.
On behalf of the Pyle Wealth Advisory team, have a wonderful weekend.
Andrew Pyle
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Andrew Pyle is an Investment Advisor with CIBC Wood Gundy in Peterborough. The views of Andrew Pyle do not necessarily reflect those of CIBC World Markets Inc.
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