March Madness Rally 

1.Breadth Continues. Last week the S&P 500 closed up over 2% for its best weekly performance this year, led by dovish Federal Reserve sentiment. The Fed held the policy rate steady, revised GDP and inflation estimates upward and lowered future rate cut expectations. Stocks reacted positively to the news as the Fed likes its chances of lowering inflation to 2% while maintaining economic growth, a positive for cyclical sectors and earnings, as we have outlined many times before. 

Communication services led all sectors up 4% on the week, followed by consumer discretionary, industrials and technology all up over 2%. Market participation has continued to widen, with 80% of S&P constituents above their 200-day moving averages. Again – we’ve been calling for the broadening, which is how we have positioned our portfolios.  

Chart 1: Stock Market Breadth Expanding¹ 

2. Consumer Discretionary Takes a Hit. On the earnings front, Nike (NKE) and Lululemon (LULU) reported in the latter half of the week, both closing in the red on Friday following disappointing guidance. Nike reported revenue and profit for Q3 2024 that beat expectations, but it projects a low single digit revenue decline in the first half of 2025. Management sentiment was very focused on new product transition and innovation, which follows their announcement from last year regarding cutting $2 billion in costs over the coming years.² Nike’s expectation for fiscal 2024 revenue growth is 1%.  

Shares of Lululemon fell over 15% Friday on weak guidance and slowing growth. Sales in North America rose 9% during the third quarter compared to 29% in the same period last year. Management stated they expect growth for the fourth quarter of 9-10%, with analysts forecasting 12.5%. Regarding the weak quarter, CEO Calvin McDonald stated, “As you’ve heard from others in our industry, there has been a shift in the U.S. consumer behavior of late and we’re navigating what has been a slower start to the year in this market.”³ Retail sales rose 0.6% in February, lower than expected, with January’s numbers revised down from -0.8% to -1.1%.  

In our view, both of these companies are losing market share to the likes of On Holding (ONON) and Hoka (DECK) as well as other apparel manufacturers versus a weaker consumer perspective. The consumer remains resilient with strong jobs, wages and savings rates. We would not extrapolate LULU and NKE’s earnings to reflect a diminishing consumer.   

3. IPO Comeback? Reddit (RDDT) began trading on the New York Stock Exchange Thursday at $34 a share, valuing the company at $6.5 billion. The stock closed on the day just north of $50 per share, rising nearly 50%. In terms of financials, the company reported a net loss of $90.8 million last year with annual sales of $804 million, a 20% increase y/y. Reddit’s future growth will be tied to its ability to license its data to third parties. Reddit’s S-1 filing noted it has entered, “…certain data licensing arrangements with an aggregate contract value of $203 million and terms ranging from two to three years.”⁴ Companies such as Alphabet, which already has a signed deal with the company, are going to want access to its vast dataset to train AI models and pick up on trends from its over 850 million monthly active users. Reddit remains a speculative situation in our view.  

Amid higher costs of capital, the IPO market has yet to reach the levels seen in 2021 but is making a comeback. In January, EY released a 2024 IPO outlook stating it believes there could be an IPO expansion this year if the cost of capital starts to decline and recent IPOs continue to gain momentum.⁵ In 2021 during the surge out of Covid, over 1,000 deals came to the market with nearly $300 billion in capital raised, both all-time records. Compared with 2022, only 181 deals went public, and 2023 was even worse with 154 total IPOs. So far this year, 39 companies have gone public, with Reddit being the fourth largest deal in terms of market capitalization. Since interest rates are expected to decline this year, cheaper capital may bring forth additional interest in public offerings. 

Chart 2: Initial Public Offerings Through the Years⁶ 

4. Buckle Up for Excessive Exuberance. This is how Bill Gross, PIMCO co-founder, finalized his most recent investment outlook published Friday. Deemed the “bond king,” he described how interest rates are merely unchanged since 2004 and are large factors in the Nasdaq 100’s twelvefold increase over this timeframe. Markets have mostly disregarded a 3% move higher in 10-year inflation adjusted yields in the last two years, which he says tells him that, “…fiscal deficit spending and AI enthusiasm have been overriding factors and momentum and ‘irrational’ exuberance have dominated markets since 2022.”⁷ 

Gross explained further that he has been concentrated in MLP pipelines and regional banks over the past year. But of course, the AI momentum cannot stay away from everyone. He was once short and now long Broadcom (AVGO) since it’s an AI “wonder stock.” In fixed income he is betting on a curve-steepener, long 2s and short 5s and 10s. He believes the flat yield curve will need to go positive if the economy is to stay strong. Gross finished off his thoughts with saying, “Buckle up for excessive exuberance.” 

In our view, there are certainly pockets of excess, but no major excess when the economy is growing above trend, jobs are strong, wages are in excess of supply and sentiment remains solid. Earnings are key to this entire equation: as long as the economy is growing above trend, so will earnings – the ultimate driver of equities.   

5. Fixed Income. U.S. Treasuries rallied throughout the week following the Fed’s new monetary policy projections that continued to anticipate three quarter-point rate cuts this year and a shallower path of cuts over time. The U.S. 2-, 10- and 30-year Treasury yields fell by 13, 10 and 6 bps, respectively. High yield spreads remain tight, reaching a new 52-week low last Friday at +341 bps. Municipal yields rose 2-10 bps across the curve.   

6. The Week Ahead. 

Earnings – Tuesday: MKC; Wednesday: CCL, CTAS, PAYX; Thursday: WBA. 

Economics – Monday: New home sales (February), the Dallas Fed Index; Tuesday: Durable goods (February), Consumer confidence, Richmond Fed Index; Thursday: Initial jobless claims, continuing claims, final Q4 GDP, pending home sales; Friday: Core PCE (February). 

Stephanie Link’s TV Schedule 

Return for Selected Indices⁸ 

Sources

1. Bloomberg. As of March 22, 2024.
2. Yahoo Finance. As of December 22, 2023.
3. CNBC. As of March 21, 2024.
4. CNBC. As of March 21, 2024.
5. EY. As of January 18, 2024.
6. Stockanalysis. As of March 24, 2024.
7. Bloomberg. As of March 22, 2024.
8. Bloomberg. As of March 25, 2024.

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