Stocks rose markedly and bonds fell. Economic data that bucked the trend and potentially transformative technologies dominated the front pages last month. In this piece, we briefly summarize February in the market and economy, and survey the potential rewards and risks ahead.

Market

Stocks rallied broadly, as US and international stocks returned +5.34% and +4.24%, respectively [1].

NVIDIA’s earnings release last month was particularly interesting – not only did the company beat lofty expectations and send the stock vaulting higher, but it also shed light on the excitement about artificial intelligence (AI) [2].

The private markets are quickly embracing AI’s potential as well. For example, on a recent conference call, a private equity fund manager described to us how they are increasingly using AI to complete time-consuming tasks of moderate complexity, boosting the worker productivity and profit margins of the companies they own.

Advances in productivity are desperately needed as the working-age population shrinks in the world’s largest economies [3], so we share the market’s hopes that an AI revolution will yield significant benefits. However, we believe the current prices of AI stocks are not attractive enough to warrant an overweighting.

Major bond indices were mostly negative, with the Bloomberg US Aggregate, Bloomberg Global Aggregate Ex-U.S., and Bloomberg Municipal Bond indices returning -1.41%, -1.18%, and +0.13%, respectively [4]. Economic data, specifically in the US, reminded the bond market that the reports of inflation’s demise “are greatly exaggerated” [5].

Economy

Lower global growth and lower global inflation continue [6]. In the US, however, economic trends are becoming uncharacteristically unclear. For example, economic data from February diverged from consensus in several ways: much stronger employment [7], reaccelerating overall inflation, and higher shelter costs [8].

Cryptocurrencies – Not loving and not hating

Cryptocurrencies are growing rapidly in popularity due to new Bitcoin fund offerings from Fidelity and BlackRock [9], and due to explosive positive performance [10,11].

What are our (abbreviated) thoughts on these assets?

As discussed in the last monthly update, cracks are appearing in the foundation of the world’s most trusted currency: the US Dollar. Cryptocurrencies could benefit as a possible competitor. They also benefit from interesting technological features that allow their users to avoid traditional intermediary costs and to automate useful processes [12].

Unfortunately, the two most popular cryptocurrencies, Bitcoin and Ethereum, are extremely volatile [10,11]. This is due, in part, to little worldwide transaction adoption [13]. Cryptocurrency investing also requires accepting many unknowns, such as changing regulatory scrutiny and the effects of potentially large energy requirements [14].

Currently, we do not recommend an allocation to cryptocurrencies in our client portfolios. Nevertheless, we believe it is important to acknowledge their potential, and to reserve the right to change our minds; a small amount in a diversifying, trusted, yet volatile asset can improve risk-adjusted returns.

Looking ahead

We welcome an ebullient market – it helps most of our client portfolios. Nevertheless, we advise against projecting recent positive performance indefinitely into the future. We believe plenty of excellent opportunities still exist, but we also recognize that the history of investing is punctuated with abrupt regime changes and unforeseen volatility. No matter the circumstances, we are committed to allocating prudently and monitoring closely.

Interested in discussing the markets and your portfolio? Contact us, we’re here to help.

¹ Eaton Vance: The BEAT, March 2024, slide 41, https://www.eatonvance.com/the-beat.php?DM=monthly-market-monitor

² CNBC: Nvidia posts revenue up 265% on booming AI business, https://www.cnbc.com/2024/02/21/nvidia-nvda-earnings-report-q4-2024.html

³ OECD: Working Age Population, https://data.oecd.org/pop/working-age-population.htm

⁴ Eaton Vance: The BEAT, March 2024, slides 24, 28, https://www.eatonvance.com/the-beat.php?DM=monthly-market-monitor

⁵ Mark Twain: “The reports of my death are greatly exaggerated.”

⁶ J.P. Morgan: Guide to the Markets, 1Q 2024, As of February 29, 2024, slides 50, 51, https://am.jpmorgan.com/us/en/asset-management/adv/insights/market-insights/guide-to-the-markets/

⁷ CNBC: U.S. economy added 353,000 jobs in January, much better than expected, https://www.cnbc.com/2024/02/02/us-economy-added-353000-jobs-in-january-much-better-than-expected.html

⁸ Bloomberg: US Core Inflation Stays High, Putting May Rate Cut in Doubt, https://www.bloomberg.com/news/live-blog/2024-02-13/us-cpi-report-for-january

⁹ Bloomberg: BlackRock and Fidelity Capitalize on FOMO From Bitcoin ETF Mania, https://finance.yahoo.com/news/blackrock-fidelity-capitalize-fomo-bitcoin-133000061.html

¹⁰ Yahoo! Finance: Bitcoin USD, https://finance.yahoo.com/quote/BTC-USD

¹¹ Yahoo! Finance: Ethereum USD, https://finance.yahoo.com/quote/ETH-USD

¹² McKinsey & Company: What is blockchain?, https://www.mckinsey.com/featured-insights/mckinsey-explainers/what-is-blockchain

¹³ Coinbase: 2024 Crypto Market Outlook, https://www.coinbase.com/institutional/research-insights/research/market-intelligence/2024-crypto-market-outlook

¹⁴ EIA: Tracking electricity consumption from U.S. cryptocurrency mining operations, https://www.eia.gov/todayinenergy/detail.php?id=61364

The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not consider any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.

The views expressed in this commentary are subject to change based on market and other conditions. This communication may contain certain statements that may be deemed forward looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

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Generally, among asset classes, stocks are more volatile than bonds or short-term instruments. Government bonds and corporate bonds have more moderate short-term price fluctuations than stocks, but provide lower potential long-term returns. U.S. Treasury Bills maintain a stable value if held to maturity, but returns are generally only slightly above the inflation rate.

Diversification does not ensure a profit or guarantee against loss.

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