FINANCIAL MARKET INSIGHT

HIGHLIGHTS

• What Could Interrupt This Rally?
• Weekly Market Preview: Can Inflation and Growth Data Push Stocks Even Higher?
• Weekly Economic Cheat Sheet: CPI Tomorrow, Key Growth Readings Thursday.
• Special Reports for Advisors and Advanced Renders:
  • Market Multiple Table Update
  • Is NYCB A Canary in the Commercial Real Estate Coal Mine?

STOCKS

✓ What's Outperforming: Growth factors, tech, consumer discretionary and communication services have outperformed thanks to strong earnings and continued "AI" enthusiasm.

✓ What's Underperforming: Defensive sectors and value have underperformed recently mostly as Treasury yields have risen, although they are poised to rebound substantially if there is a surprise of growth.

What Could Interrupt This Rally?

Stocks extended the rally and the S&P 500 hit a new all-time high and finally topped the 5,000 level; the question that investors should be asking is not "Why did stocks keep rallying?" but rather "Why would stocks not keep rallying?"

Our investment team says that because the news and data reinforced the three drivers of this bull market:

1. Fed rate cuts by May
2. Solid economic growth (and no signs of a hard landing)
3. Continued disinflation and strong earnings

Our broader point is this: The burden of proof lies squarely with the bears and so far, the economic data and Fed speak have not done enough to disprove any of those four bullish factors.

Emerging Risks & Positioning

Now, while it is true that the burden of proof lies with the bears, and so far, they have not had any news to derail this rally, the reality is there are a number of risks emerging. Here is the point: We get the S&P 500 5k euphoria, but the inevitability of the rally is not accurate. Yes, data has pointed to a sweet spot for growth, inflation, and the Fed; but that will not last forever and there will be bad news for this market, there always is.

So, our investment team wanted to point out the risks that have quietly grown in the background during this rally:

1. Rate cut disappointment: The chances of a May rate cut have declined from 100% three weeks ago to just over 70% as of last Friday. If those expectations drop below 50%, Treasury yields will rise and that will be a negative for stocks.
2. Layoffs: The jobless numbers (monthly numbers and claims) are at odds with the long and growing list of companies announcing layoffs...
3. Commercial real estate (CRE): We profiled this risk last month, and what is notable is it is not just New York Community Bancorp (NYCB) that has been hurt by bad commercial real estate loans...
4. Valuations, enthusiasm: Our team has always maintained that valuations themselves are not something that causes a reversal in stocks...

Bottom line: it is important to acknowledge that this rally has been driven by actual good news and bullish expectations being reinforced by actual data. At the same time, the risks that kept investors worried in October (and even throughout 2023) have not been vanquished-they simply have not shown up, yet!

From a positioning and tactical standpoint, we continue to prefer the minimum and lower volatility and value overgrowth. These metrics outperformed through January but have lagged the past two weeks into February, as tech has rallied after earnings; but the risk-reward here continues to imply we should be focused on limiting downside exposure in the event of disappointment, not reaching for upside in a market that is already trading at an unsustainable valuation (above 20X earnings) and has priced in essentially a financial version of Nirvana (low inflation, dovish Fed, solid growth, resilient earnings and no negative surprises). We suppose that can happen, but in our 30+ years in this business, we have not seen it yet (and this is not to be confused with irrational exuberance).

Economic Data (What You Need to Know in Plain English)

There were only two notable economic reports so far in February, but both supported the "No Landing" economic thesis and as such, helped the S&P 500 to touch 5,000 on Thursday. However, one of the reports also echoed a potential rebound in inflation and as such, this week's CPI, which will be closely watched as a rebound in inflation is not at all priced into stocks (or bonds) at these levels and would cause immediate volatility.

Looking at this month's data, the key growth report was the ISM Services PMI... However, the one negative in this report was a jump in the price index to 64.0 from 56.7...

The other notable number this month was weekly jobless claims, which declined slightly to 218k vs. (E) 227k...

Bottom line: This market has rallied on the ideas of 1) Fed rate cuts (meaning May or earlier), 2) Stable growth and 3) Continued falling inflation. The data this week has the opportunity to continue to reinforce those expectations (and support S&P 500 5,000) or refute them (and pressure stocks), so this is an important week for investors.

COMMODITIES, CURRENCIES & BONDS

Commodities remain mixed as a stronger dollar, fading hopes for economic growth overseas and easing inflation worries continue to weigh on the metals, while escalating geopolitical tensions resulted in energy bucking, the otherwise heavy trend, with oil posting a solid gain.

Trading in gold has remained quiet as futures remained pretty well pinned to the $2,050 level... Look for initial support at $2,000/oz. as the long-term outlook remains bullish given the new record highs in late 2023.

For now, the outlook for the oil market remains cautiously bullish...

Bottom line: the best-case scenario for the Israel-Hamas conflict, a ceasefire, is the worst case for the oil market right now.

SPECIAL REPORTS FOR ADVISORS AND ADVANCED RENDERS

Market Multiple Table Update

The February update of the Market Multiple Table clearly and efficiently delivers this message:

Looking at the changes in this month's Market Multiple Table, there were several positive changes...

Is NYCB A Canary in the Commercial Real Estate Coal Mine?

New York Community Bank (NYCB) stock has continued to decline following its disastrous earnings report... So, we wanted to cover:

1. Why commercial real estate worries are legitimate,
2. If it can be compared to what occurred in '07/'08 and,
3. What any type of commercial real estate stress means for markets.

Why Are People Worried About Commercial Real Estate?

The commercial real estate (CRE) market is facing stress and prices are declining... Bottom line: a combination of higher rates and workplace changes have negatively impacted the CRE market...

Can What is Happening in CRE Be Compared to the Origins of the Housing Crisis?

So far, thankfully the answer is "No," but the list of similarities is growing...