By Ryan O'Rourke on March 22, 2024

Happy Friday March 22nd!

Stocks race higher as the Federal Reserve holds interest rates steady and signals that interest rate cuts are coming…soon.  Interest rate cuts could initially provide a catalyst for economically sensitive assets but history signals “embrace the pause, fear the cut.”   Early maple syrup season and Frenchies led the pack…again!

#1 – Weekly Market Recap – Stock markets powered higher this week following dovish commentary at Wednesday’s Federal Reserve meeting.

All three major US stock indices closed at all-time highs. Through Thursday’s close, the NASDAQ and Dow Jones each increased +2.8%, while the S&P 500 was up +2.4%.

Early morning trading this morning indicates that stocks could pause following Wednesday’s gains.

Stock markets embraced commentary from the Federal Reserve on Wednesday, when Fed Chair Powell signaled that the Federal Reserve still plans to cut interest rates in 2024. Investors applauded the Fed’s willingness to brush aside recent hot inflation readings and strong labor market data.

The S&P 500 is up almost +10% in the 1st Quarter of 2024, driven by strong earnings, resilient economic data, and continued loosening of monetary policy. If the S&P 500 remains at current levels, it would be the strongest 1st Quarter since 2019 and the 2nd best Q1 in the last decade.

While at DSG Advisors we welcome the strength of the markets to start 2024, we think the time may be coming to be a bit more cautious.  With history as our guide, we believe the notion “embrace the pause, fear the cut” could serve investors well in the future.

#2 – Fed Continues to Pause – The Federal Reserve left interest rates unchanged at their second meeting of 2024 on Wednesday and stocks advanced higher on the news.

In addition to leaving interest rates at previous levels, the Federal Reserve updated their expected monetary policy path for the year. Investors focused their attention on three questions:

1. Is the Fed worried about the recent high inflation data?
2. Does the Fed plan to cut interest rates three times this year?
3. When will the first-rate cut happen?

Fed Chair Powell answered these questions ‘No’, ‘Yes’, and ‘Soon’ with what appeared to have been a higher degree of clarity than in previous press conferences.

When questioned whether recent higher-than-expected inflation readings would impact the Fed’s view that inflation continues to decline, Powell responded:

“I would say that the story is really essentially the same and that is of inflation coming down gradually toward two percent on a sometimes-bumpy path… We’ve had two months of kind of bumpy inflation. We’re saying that well, it’s going to be a bumpy ride.”

– Jerome Powell, FOMC post-meeting press conference (3/20/2024)

Stock and bond markets interpreted this to mean that the Federal Reserve will proceed with cutting interest rates, even if inflation remains slightly elevated in the near term. 

The Fed’s own projections signal that they plan to cut rates 2 to 3 times in 2024, consistent with their prior messaging. While Powell did not provide exact dates for when the rate cuts will start, his messaging appeared to indicate that the first cut could come this summer.

#3 – The Fed’s Prolonged Pause – Ryan Gabinski from the research firm Strategas published some interesting findings yesterday about stock returns when the Federal Reserve has a “long pause” when cutting interest rates.

In his research, Gabinski found that the longer the Federal Reserve holds the pause (i.e., the time between rate hikes and cuts), the more favorable the market’s trajectory becomes. Specifically, his research revealed that when the pause exceeds 100 days, stocks surge with an average increase of 13%. The largest increase occurred in 2006 -2007, when the S&P 500 soared 22%.

Gabinski also found (our own research concurs), that historically stocks advance during the pause, but then decline on average after the first interest rate cut. At DSG Advisors, we interpret the lesson to be “embrace the pause, fear the cut.” 

In addition to the increase in stock prices, Gabinski discovered that sector shifts emerge as well.  During the 2006-07 pause, Communication Services, Consumer Discretionary and Technology sectors initially lead sector returns. 

However, a rotation occurred later in the pause and Energy and Industrials emerged as the leading sectors. It should be noted that Communication Services and Technology companies continued to move higher, but not at the same rate as Energy and Industrial companies.

Source: Strategas 3/21/2024

Gabinski found that in the latter portion of the 2006-07 pause, the dollar fell while oil, copper and emerging markets experienced significant increases.  Intuitively this makes sense as rate cuts can initially stimulate economic growth – with oil and copper historically benefiting from increased economic activity.  

Source: Strategas 3/21/2024

At DSG Advisors, we are mindful that each period in history has its unique conditions and outcomes.  As a result, we would not be surprised to see the outcome from the current conditions deviate from the 2006-07 pause.  Nevertheless, we have found that history can serve as a “road map” of what may lie ahead and are paying close attention to the dollar as well as economically sensitive assets as we navigate through the current market cycle.

Source: Yahoo Finance

#4 – Early Maple Syrup Season – Even though we’re awaiting a snowstorm in Minnesota this weekend, it has been an unusually mild winter in the Midwest. Due to the warmer than average temperatures, the ground has already begun to thaw. This means that tree sap has started to flow.

Once spring arrives, maple trees begin to “wake up” from their winter dormant state. Those first few weeks of spring, when it’s above freezing during the day and below freezing at night, are the ideal time to tap maple trees. Many people enjoy collecting the watery sap and boiling it down to condense it into maple syrup.

In a typical year, producers collect sap in mid-March or April. However, in many parts of the Midwest, the warmest winter on record drove farmers and syrup producers to start collecting tree sap for maple syrup a month earlier than normal.

Karl Martin’s family taps about 4,500 trees annually.  In 2024, they have already lost out on 25% of their production because of the unexpected early spring. Martin said the days of believing sap is never going to run before March 15th are over, “And this year’s the ultimate example of how early the season can start,” he said. 

Experts say that the shift in maple syrup season could be an indication of how climate change is affecting trees. Eli Suzokovich III, an assistant professor at Northwestern University who teaches a class on maple syrup and climate change, stated that Indigenous people have been finding solutions to give maple trees a break and tapping different varieties of trees.  “Maple trees have sustained humans for centuries,” said Suzokovich III. “Now maybe it’s just our turn to return the favor.”

Source: AP News

#5 – Frenchies are #1 – Once again in 2023, the French Bulldog was the most popular purebred dog in the United States.  According to the American Kennel Club (AKC), for the second year in a row, more French Bulldogs were registered than any other breed.  The 98,500 new French Bulldogs registered in 2023 was down slightly from the whopping 108,000 registered in 2022.

The French Bulldog’s large bat-like ears are its trademark feature, as are the heavy wrinkles above a very short nose. The playful, alert and affectionate temperament makes it a great companion for singles, couples or families. French Bulldogs are a small-dog breed that doesn’t require a lot of exercise, so they make popular companions for city-dwellers. “They’re interesting little beings,” said Naneice Bucci, who has owned and shown them for decades.

While the French Bulldog gains in popularity, many longtime fans are not celebrating. There is concern among long-time breeders that the hot market for Frenchie puppies is incentivizing people to breed puppies for quick cash and not for preservation of the breed. By not following AKC standards or performing recommended health tests before breeding, the result could be unhealthy dogs prone to eye and skin conditions, as well as difficulty breathing and gagging issues due to the very short snout.

Preferences for our four-legged companions shift over the years for reasons ranging from media exposure to changing lifestyles – such as people moving from rural and suburban areas to cities. In 2022 French Bulldogs topped Labrador Retrievers in popularity for the first time after Labs held the top spot for a record 31 years.

After Frenchies, the most popular breeds registered in 2023 were Labs, Golden Retrievers, German Shepherds and Poodles.

Source: AP News

Have a great weekend!

Denver & the DSG Team

DSG Advisors
3033 Excelsior Blvd, Suite 530
Minneapolis, MN, 55416
(612) 293-9700
dgilliand@dsgadvisors.com